PP has noted the unusually high proportion of housing sales that are all cash, indicating an investor rather than a homeowner. Who cares, right, a sale is a sale? That is, until the investors pull out, quit buying and unload. Rents just aren't high enough to justify big investors taking big risks on big investments.

3. Freddie Mac Interest Rates shoot up 50 basis points over the last couple of weeks.

Correlation?

Here are the fine points. If rates go up, more buyers are priced out of the market that they are looking at. Entry level homes become even more competitive for purchases. Medium priced homes, above $200k, lose buyers. Values must fall to stimulate buyers.

As interest rates climb higher, it reinforces dropping values for affordability, and only serves to bring back investors into the market. But, more people go back into negative equity positions, destroying the move up market even further.

More foreclosures begin to occur.

This is the "Death Spiral" that many of us expect to happen. Recovery time from it. 10 years or more.

These people at the CFPB are the worst idiots. They implement a rule whereby any loan with 43% or under Debt to Income will not have an Ability to Pay requirement that ensures the lender will determine Ability to Pay. Then, they allow that rule to be "exceptioned" by having any loan eligible to be purchased by the GSE's not subject to Ability to Pay.

Now, the CFPB will exempt other entities from the Ability to Pay rule. These entities will be those who lend to low income people, so the Community Reinvestment Act remains okay.

Last week, I did a presentation for the group that showed how 95% of all loans under $175k, with a 36% or greater DTI, has negative cash flow when Net Income after Taxes and Living Expenses are factored in with a Cash Flow Analysis. Needless to say, they were stunned that such loans were being done, and being bought by the GSE's and FHA and we are moving to accelerate this part of the program for portfolio lending.

Doesn't the government ever learn a damned thing form its failures? Never mind................don't bother to answer..........it was all rhetorical anyway................

Technically, Sloan is correct when he speaks about Subprime lending in 2007. The loans being done were 100%, stated income, with only a warm breath in the last hour needed to qualify.

He is also correct about Easy Money not fueling the "Frothy Market". And yes, lenders are maintaining lending standards because the GSEs have become more restrictive with what they buy. But that is not really the story.

But a few comments:

1. Wells Fargo claimed that they never engaged in Subprime lending. This is well known. However, I happen to have one of their Subprime rate sheets, and it is entirely consistent with all other Subprime lenders. So anything that WF says should be taken as "WTF?"

2. Sloan and others ignore the impact that FHA and VA loans are having. FHA can be obtained with no more than 3.5% down, and VA at $200 down. Credit Scores are generally above 680 for qualifiers, and Debt to Income around 43%. But there within lies the problem.

FHA and VA loans generally run at lower loan amounts. Usually, they are under $200k. For almost any FHA loan under $175k, I can prove that at above 36% DTI, there is not enough Cash Flow to service the loan, all debt, and living expenses. Even at $200k, this is still a severe problem.

FHA is currently running at 16% delinquency rate, with 9.6% in default. These numbers are greater than ever before with FHA, and are fast approaching those of the worse Subprime Grades. (Subprime was not all about bad credit scores. Great scores in the 700's defaulted all the time.) That is why Caplin and others indicate that at least 30% will default within 5 years, and I have absolutely no problem with that analysis.

Bubble? 10% year over year? Remember three years ago, after the bubble burst and people were saying that the 10% and above increases should never have been accepted as the new normal?

Right now, 91% of all new mortgage loans issues are government "guaranteed". Of them, 46% are FHA and VA, with FHA being the overwhelming bulk. Curious that the Minn Fed Chairman says that the Fed is buying over 90% of all new originations. Where are the buyers for this product if the Fed has to buy it all?

The other 9% of originations are being either held in portfolios, hard money by private lenders, or a few are being done with Premium High Grade Securitizations by companies like Redwood Trust. These are generally sold to REIT's, etc.

The simply fact, if Sloan would admit it, is that without the Fed buying the loan new originations, there would be little demand for the MBS. Only by rates increasing would demand start again. (MBS demand that Scott quotes is in the ranges for 5% and above coupons, which is also what the Fed in Op Twist is now buying, trying to get off the market, so that lower rates of new issuances will be desired.)

But if rates go up, refinance and new purchase activity suddenly drops, as will be reported over the next few weeks as the Freddie Mac rates hit 4%. When the rates go up, prices will have to fall on homes to have buyers, otherwise the buyers are priced out of the market.

Here is something to check out. I attached a rate sheet from today for review. It is interesting in that you will notice the following:

1. There are no Non Agency loan programs represented. That is because there are no Non Agency loans to be had.

2. The Adjustables are for 5, 7 and 10 years. Nothing under that which was characteristic of lending prior to 2007.

3. When you look at a rate on any program, you see a number next to it, positive or negative. These numbers represent "cost" to the borrower on the loans in the inverse. So a negative number is in fact, what excess is in the quote. But this number gets "eaten up" rather quickly. Here is what I mean.

Page 7 and 8 are what is called "Risk Hits". What it means is that when certain conditions are present, like higher LTV, lower Credit Scores, type of property, etc., the loan costs more. So the number to the far right of each applicable "Hit" is the amount of the hit.

As you can see, FICO and LTV are the two biggest factors for risk. Then property type and Mortgage Insurance. Very quickly, the "excess" gets eaten up. So the bottom line is that the greater the risk factors, the greater the interest rate.

This is traditional underwriting and pricing of loans.

You can see from the rate sheets how increasing interest rates will affect lending, making it more expensive, and pricing people out of the market, until home values fall to meet the new increased rates.

New single-family home sales rose 2.1% in May to a 476,000 annual rate, easily beating the consensus expected pace of 460,000. Sales are up 29.0% from a year ago.Sales were up in the Midwest, Northeast and West, but down in the South.

The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 4.1 in May from 4.0 in April. The faster selling pace was more than offset by a 4,000 unit rise in inventories.

The median price of new homes sold was $263,900 in May, up 10.3% from a year ago. The average price of new homes sold was $307,800, up 9.6% versus last year.

Implications: The new home market, which is typically the last piece of the housing puzzle to recover, is clearly improving. New home sales came in at the highest pace since July 2008. A lack of inventory in the existing home market appears to be driving buyers to the new home market, where sales were up 2.1% in May and up 29% from a year ago. By contrast, existing home sales are up 12.9% from a year ago. The months’ supply of new homes – how long it would take to sell the new homes in inventory – rose to 4.1, but is still well below the average of 5.7 over the past 20 years and close to the 4.0 months that prevailed in 1998-2004, during the housing boom. As a result, as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders are getting ready for that transition. Inventories have increased in 9 of the last 10 months. Higher inventories aren’t something to worry about and are not leading to more vacant homes; the number of completed new homes still sitting in inventory is at a record low, as buyers swoop in quickly. No wonder prices for new homes are up 10.3% from a year ago. In other housing news this morning, home prices continue to gather steam. The FHFA index, which covers homes financed with conforming mortgages, rose 0.7% in April and is up 7.4% in the past year. The Case-Shiller index, which covers homes in the 20 largest metro areas, increased 1.7% in April and is up 12.1% from a year ago. Both indexes show price gains for 15 straight months. According to Case-Shiller, recent price gains have been led by San Francisco, Las Vegas, and Los Angeles, although all 20 areas have been rising. On the manufacturing front, the Richmond Fed index, a measure of manufacturing sentiment in the mid-Atlantic, increased to +8 in June from -2 in May, suggesting a solid gain the national ISM manufacturing index when that report comes out early next week. Looks like the Plow Horse economy is starting to trot. The fact that the Fed is considering tapering QE is a good thing, not bad. Equities will be noticeably higher at year end than they are today.

http://mhanson.com/archives/1324?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MarkHansonAdvisers+%28Mark+Hanson+Advisors%297-5 Rates “Carage” Summary…Housing & Mortgage Significantly Impactedby Mark on July 5, 2013We have been raising red flags on the spike in rates for weeks now. But today, the back of the market was broken, as “real rates” used by the majority of buyers / refinancers — not the “bait & switchers” quoted in your local rag, by the GSE’s, or by organizations that don’t realize people don’t take out mortgages that cost 3 points — rates shot over 5% today with conviction…3% 10s and 5.75% mortgage rates look to be in the bag.But even at today’s levels “the surge” was a significant “credit event” for housing and mortgage. It’s going to be an ugly Q3/Q4 for these sectors.Below I quickly summarize the damage done to Existing Sales, house prices, builders, New Home Sales, home improvement, and the mortgage-centric regional and national banks:1) To Existing Home Sales and macro house prices “the surge” takes the PE investor out of the equation. The PE “investor” was the cohort regularly paying 10% to 20% more than the appraised value or ask price looking at 1.5% UST and rental yields to guide them. They are responsible for pushing up the floor on housing, creating a new price bubble, and establish high “comparable sales” in every region they pounce. At a sub-3% cap-rate in the most popular “buy and rent” regions this “trade” looks rotten relative to a 2.7% 10-year note.And remember, it only takes 3 sales to change the value of 300 houses using the comparable sales valuable method.Moreover, it further sidelines First-Time buyers who have already been priced out of the market by PE firms…volume down up to 70% since 2010. Lastly, it greatly diminishes the ability for “move-up” organic buyers to complete their “contingent’ transaction as they just lost 20% purchasing power in the past 2 months…not able to sell their house and/or buy the new one.2) To Builders / New Home “Sales” – at least half of which are not associated with a “locked-in” mortgage rate at the time the “sale” is counted as such — “the surge” will increase fall out of the past 6 months’ sales by 19%, I estimate.There is no way for builders to make up for this large of Q3 and Q4 fall out through increased sales volume in a surging rate environment.3) To home improvement/materials – although being highly levered to distressed resales, which are down 70% (artificially) in the important regions over the past 18 months — the spike in rates and subsequent fall in house sales volume on tap will weigh. This will happen right about the time the average investor (e.g., the real money sov wealth fund that owns HD etc) realizes how important to these firms’ sales “distressed” really was.4) To the mortgage-centric regional and national banks, they now have a hole blown into earnings by the sudden loss of “mortgage banking”, which has driven top and bottom line earnings for since Q4 2011.Certain banks we have identified as “overly reliant on mortgage banking”, as a percentage of top and bottom line revenue, just had a hole blown through their most stable revenue and growth channel. This is due to refi production that will be down 75% in Q3, a massive QoQ and YoY crash. Moreover, purchase money loans for existing and new home sales are also set for some fugly numbers on “the surge”. Lastly, by the end of Q3/early Q4 house prices will be on the decline as measured by every other index besides CS who lags real prices by 4 to 7 months.The regional/national mortgage-centric banks in the US have been operating as little more than the gov’t mortgage brokers — refinancing everybody who could refi — each time rates drop another 100bps over the past 4 years. How exactly will a rise in “NIM” make up for the almost total loss of “Mortgage Banking” that has driven top and bottom line revenue for 2 years??

Obviously, these forecasts are open to velocity, duration, and depth revisions if rates suddenly plunge. However, based on what has happened over the past 6 weeks to rates there is no getting around a sharp “hiccup” to housing and mortgage banking in Q3/early Q4 on an absolute, QoQ and YoY basis.

Once again, Mortgage Applications fall for the week.• Total activity -4% decrease, adjusted rate, 23% non adjusted• Refinance activity - 4% down• Purchase activity - 4% down adjusted, 23% down non-adjusted• Refinance down to 64% of total• HARP rose to 35% from 34%. This only occurred before total activity decrease by 4%.Clearly, the increase in rates are affecting all lending sectors. This bodes ill winds for the housing market in the future as rates increase further.

Mortgage applications decreased 4.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 5, 2013. This week’s results included an adjustment for the July 4th holiday. The Market Composite Index, a measure of mortgage loan application volume, decreased 4.0 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 23 percent compared with the previous week. The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 23 percent compared with the previous week and was 5 percent higher than the same week one year ago. The refinance share of mortgage activity decreased to 64 percent of total applications. The adjustable-rate mortgage (ARM) share of activity decreased to 7 percent of total applications. The HARP share of refinance applications rose from 34 percent the prior week to 35 percent. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.68 percent, the highest rate since July 2011, from 4.58 percent, with points increasing to 0.46 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.86 percent, the highest rate since July 2011, from 4.68 percent, with points decreasing to 0.37 from 0.38 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.37 percent, the highest rate since September 2011, from 4.27 percent, with points decreasing to 0.39 from 0.44 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.76 percent, the highest rate since July 2011, from 3.64 percent, with points decreasing to 0.41 from 0.44 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week. The average contract interest rate for 5/1 ARMs increased to 3.40 percent, the highest rate since May 2011, from 3.33 percent, with points increasing to 0.54 from 0.31 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.

Housing Reform BreakoutThe House GOP moves to revive the private home mortgage market.

One perverse result of the financial crisis is that Washington has nationalized housing finance. Taxpayers guarantee about 85% of new mortgages, some $5.1 trillion in mortgage credit and growing. So it's a big and welcome political breakthrough that House Republicans are taking steps to protect taxpayers and restore some rationality to housing markets.

On Thursday, House Financial Services Chairman Jeb Hensarling unveiled legislation to close down Fannie Mae FNMA -2.74% and Freddie Mac, FMCC -2.90% add much-needed discipline to the Federal Housing Administration, and clear away regulatory barriers to more private housing capital. Much like Paul Ryan's Medicare reforms, Mr. Hensarling is widening the Washington debate and giving Republicans a sensible reform position to rally around.***

The Texas Republican starts by taking the White House up on its February 2011 offer to wind down Fannie and Freddie, which still owe taxpayers $187 billion for their bailouts. He'd do so over five years by shrinking their mortgage portfolios by 15% a year, gradually lowering their loan limits to $525,500 from $625,500, and eliminating their politicized "affordable housing" goals and slush fund.

This statement of intent is especially crucial as memories fade of the toxic duo's central role in the crisis. Amid rising home prices, the political temptation will be to give up the hard slog of reform and use Fan and Fred's renewed profits to finance other spending. Mr. Hensarling's reform is also superior to the Senate's Corker-Warner bill, which would wind down Fan and Fed but still give other private lenders a federal guarantee.

The House proposal also takes some useful steps to reform the Federal Housing Administration, if less ambitious than we'd prefer. Washington has used the crisis as an excuse to greatly expand FHA, which may still need a federal bailout. So the bill would try to limit mission creep by defining FHA's purpose as insuring first-time homebuyers and low- to moderate-income borrowers.

Mr. Hensarling would try to force FHA to act more like a private mortgage insurer by spinning it off from the Department of Housing and Urban Development and requiring it to be financially self-sufficient with GAAP-accounting and a minimum 4% capital cushion from 2%. Today, any mortgage loan worth $271,050 or less is eligible for FHA backing. The proposal would move that threshold to $200,000, thus reducing taxpayer risk.

The bill also would eliminate FHA's money-losing reverse mortgage business and gradually reduce FHA's taxpayer-backed coverage levels to 50% from today's 100%. We'd prefer 0% taxpayer backing, but that would have cost GOP votes and thus doomed the bill.

The housing lobby will still oppose this as a threat to the housing recovery, but don't believe it. All first-time borrowers will be eligible for FHA backing, regardless of their income. The bill would reduce FHA's loan limits to the lower of 115% of area median home prices, or 150% of high-cost area loan limit, with a maximum limit of $625,500 from $729,750 today. That's still tens of millions of home buyers.

The third leg of the bill aims to increase market competition with a hodgepodge of initiatives, notably easing Dodd-Frank's rules for "qualified mortgages." When fully implemented, these rules will limit the supply of mortgage credit without any reduction in taxpayer exposure.

Less admirable is the bill's proposal for a National Mortgage Market Utility that would set best practices for mortgage securitization and operate a clearinghouse to match loan originators with investors. This echoes Dodd Frank's creation of clearinghouses for derivatives that expand taxpayer risk. Many industries set best practices without government intervention, and mortgages should be no different.

The bill also institutes a three-year delay to the Basel III capital rules and creates rules for a "covered bond" market. Covered bonds are debt securities that stay on a bank's balance sheet and are backed by other mortgages. They can increase liquidity and make it easier for lenders to modify loans that run into trouble.

Covered bonds are new to the U.S., but they have been used for decades in Europe. This provision has been promoted by New Jersey Republican Scott Garrett in an effort to show that a robust private mortgage market can exist without government guaranteeing 30-year mortgages. They deserve a market trial.***

As ever, the political opposition to all this will come from the housing industrial complex of Realtors, homebuilders and Wall Street mortgage lenders who don't want to give up their taxpayer guarantee. But they should understand that the same Dodd-Frank restrictions they loathe are the political price of that guarantee. Give up the guarantee, and after a transition they'd have a much more sustainable housing market going forward, one less subject to boom and bust and with less political interference.

House Democrats won't help Mr. Hensarling, so he'll have to count on GOP votes. Whatever its fate in the Senate, Mr. Hensarling's proposal is an important statement of GOP principles and intent. He deserves support if Republicans elected on the tea-party wave want to maintain credibility as reformers against crony capitalism.

Government favoritism for housing was one of the main causes of the crisis, and political control over mortgages will only lead to more misallocation of capital and future taxpayer bailouts. The housing markets need a private rescue.

New single-family home sales rose 8.3% in June to a 497,000 annual rate, beating the consensus expected pace of 484,000. Sales are up 38.1% from a year ago.Sales were up in the South, Northeast and West, but down in the Midwest.

The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 3.9 in June from 4.2 in May. The decline in the months’ supply was completely due to the faster selling pace of homes. Inventories rose by 2,000 units.

The median price of new homes sold was $249,700 in June, up 7.4% from a year ago. The average price of new homes sold was $295,000, up 8.5% versus last year.Implications: For those of you worried about how the one percentage point jump in mortgage rates would affect the housing market, today is the first look at purchase contracts signed in June and, just as we expected, there was no impact. New home sales jumped sharply, coming in at the highest pace since May 2008. A lack of inventory in the existing home market appears to be driving buyers to the new home market, where sales were up 8.3% in June and up a massive 38.1% from a year ago. By contrast, existing home sales are up 15.2% from a year ago. The months’ supply of new homes – how long it would take to sell the new homes in inventory – fell to 3.9, well below the average of 5.7 over the past 20 years and even below the average of 4.0 months that prevailed in 1998-2004, during the housing boom. As a result, as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders are getting ready for that transition. Inventories have increased in 10 of the last 11 months. However, higher inventories aren’t something to worry about and are not leading to more vacant homes. The slight rise in new home inventories so far has all been for home where building has yet to begin. The number of completed new homes still sitting in inventory is at a record low, as buyers swoop in quickly. No wonder prices for new homes are up 7.4% from a year ago. In other recent housing news, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.7% in May and is up 7.3% from a year ago. On the manufacturing front, the Richmond Fed index fell to -11 in July from +7 in June. The report conflicts with gains in other regional factory surveys, such as the Empire State and Philly Fed, which showed better growth in July.================================================

And now, with his permission, some content from our Pat-- our regrets that the charts do not print here in the forum:

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Okay, in the interest of fair play, I have posted both sites review on Housing Sales, and I am going to explain why both articles are written by IDIOTS!!!!

1. Nowhere do I see where either party has written that these sales were based upon contracts written primarily in April, and then the first two weeks in May. It takes better than 30 days to close, so rates had been locked in prior to the big moves in most cases. So, interest rates did not have anything to do with the drop.

2. Investor Purchases fell sharply in both Month over Month and Year over Year. Bad news for the future. Where is that mentioned?

3. Existing Home Sales is much more important than New Home Sales. New Home is 7% of total sales, yet Broker Commissions on Existing Sales add up to 60% of Builder Residential Investments. (Bet you never heard that before.)

4. Add in the flipper or rental investor activity dropping from $30k to $70k or more in each home, and the dollar amount really increases for existing sales. Now, that is going to drop and affect the local economies.

5. Lowest rates on record have served to pull forward demand for homes, just like the 2010 Tax Credit. What happened after the Credit expired? Yep, housing crashed again. Just like what is going to happen again. (But wait.............this time is different..............yeah, right.)

6. It took years for rates to fall to levels in early 2013, and normally rates increase slowly. The May-Jun increases were virtually overnight. Not representative of normal conditions and only due to the threat of QE going away. Now, faith is lost in the Fed, so though rates are slowly dropping a bit (as my people predicted, and I said here), they will not drop back down to the previous low levels. (Have Faith in Fed............or else.)

7. Between 50-60% of the regular home buyer market is gone, due to either low or negative equity, or else due to credit/income restrictions, plus tighter underwriting. Where will new buyers come from? (Overseas?)

8. Low inventory is not as low as claimed, when one considers that 50-60% of "buyers" are out of the market. And if investors leave, then low inventory will be less consideration yet. (Anyone ever mention that aspect? Shows further proof of how REITs have screwed up the market.)

9. There is evidence that the REITs are scaling back purchases of homes due to costs, and also that rental returns are not as productive as first thought. This will get even more problematic. Also expect that REITs will begin to sell properties to take advantage of the temporary increase in values. (Blackrock is now establishing an "investor lending division" whereby they are going to loan $10m plus to investors looking to buy rentals. Think they are potentially considering bailing out of the housing market?)

10. There are reports that 50% of Wall Street rentals are vacant. If so, this bodes even worse for the future.

11. Watch values begin to decrease as all of the above takes effect.

12. First time buyers who had loan approval but not locked are now out of the market in many cases. Others who had not locked yet, but had contracts approved, are now screwed and will have to reenter negotiations to drop the price, or look for smaller homes. (I have talked with several who have quit looking due to the higher rates.)

13. Most first time buyers have been "used up" anyway. What is left cannot get approved.

Second, I usually ignore the median price. The median price is distorted by the mix, and with more conventional sales - and more mid-to-high end sales - the median is increasing faster than actual prices (as reported by the repeat sales indexes).

The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 1.9% in June from May, and is only down 7.6% from June 2012. This fits with the weekly data I've been posting.

This is the lowest level of inventory for the month of June since 2001, but this is also the smallest year-over-year decline since June 2011. The key points are: 1) inventory is very low, but 2) the year-over-year inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.

When will the NAR report a year-over-year increase in inventory? Soon. Right now I'm guessing inventory will be up year-over-year in September or October.

Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.

Another key point: The NAR reported total sales were up 15.2% from June 2012, but conventional sales are probably up close to 30% from June 2012, and distressed sales down. The NAR reported (from a survey): Distressed homes – foreclosures and short sales – were 15 percent of June sales, down from 18 percent in May, and are the lowest share since monthly tracking began in October 2008; they were 26 percent in June 2012.Although this survey isn't perfect, if total sales were up 15.2% from June 2012, and distressed sales declined to 15% of total sales (15% of 5.08 million) from 26% (26% of 4.41 million in June 2012), this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying; the NAR is reporting:All-cash sales made up 31 percent of transactions in June, down from 33 percent in May; they were 29 percent in June 2012. Individual investors, who account for many cash sales, purchased 17 percent of homes in June, down from 18 percent in May and 19 percent in June 2012. The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Click on graph for larger image.

Sales NSA in June (red column) are above the sales for 2008 through 2012, however sales are well below the bubble years of 2005 and 2006.

The bottom line is this was a solid report. Conventional sales have increased sharply, although some of this is investor buying. And inventory is low, but the year-over-year decline in inventory is decreasing.

Existing home sales dropped 1.2% month-over-month - the biggest drop in 2013 - against expectations for a 1.5% rise. Critically though, this is for a period that reflects closings with mortgage rates from the April/May period - before the spike in rates really accelerated. Inventory rose once again to 5.2 months of supply (vs 5.0 in May) and you know the realtors are starting to get concerned when even the ever-optimistic chief economist of the NAR is forced to admit that 'stunningly' "higher mortgage rates will bite." With mortage applications having collapsed since May, we can only imagine the state of home sales (especially as we see all-cash buyers falling) for July.

NAR chief economist, said there is enough momentum in the market, even with higher interest rates. “Affordability conditions remain favorable in most of the country, and we’re still dealing with a large pent-up demand,” he said. “However, higher mortgage interest rates will bite into high-cost regions of California, Hawaii and the New York City metro area market.”...Regionally, existing-home sales in the Northeast declined 1.6 percent to an annual rate of 630,000 in June but are 16.7 percent above June 2012. The median price in the Northeast was $270,400, which is 6.8 percent above a year ago. Existing-home sales in the Midwest were unchanged in June at a pace of 1.21 million, and are 17.5 percent higher than a year ago. The median price in the Midwest was $170,100, up 8.9 percent from June 2012. In the South, existing-home sales slipped 1.5 percent to an annual level of 2.03 million in June but are 16.0 percent above June 2012. The median price in the South was $186,300, which is 13.7 percent above a year ago. Existing-home sales in the West declined 1.6 percent to a pace of 1.21 million in June but are 11.0 percent above a year ago. With ongoing supply constraints, the median price in the West was $282,000, a jump of 19.9 percent from June 2012.

Interesting she notes that investors are leaving the market. Also that higher priced homes increased, when lower priced homes decreased in sales.

Foreclosure sales are dropping for different reasons:

1. Modification efforts are delaying foreclosures buy 6 months to a year or more. Extended foreclosure timelines are occurring in all 50 states.

2. More loans are being modified per HAMP. But after 5 years, the rates will go up, and then defaults begin again.

3. The way that certain servicers like Nationstar are handling foreclosures and the related sales to REITs are not showing up in normal sales stats. Incredibly, they are foreclosing in their own name, then adding the REIT to the Deed, and then Quit Claiming themselves off. This "hides" the transaction from normal reporting, though taxes are paid.

We having been hearing for two years plus about record interest rates. Now that I have the GSE data, I have noticed something.

Though rates have been down in the 3's, typically, the borrower is not getting those type of rates. Much more likely are rates in the 4's, and even in the low 5's. The reason is based upon different borrower factors, LTV, FICO, DTI, and other "unknown" considerations not present in the data sets.

Also of note is that two different borrowers with the same characteristics of loan amount, FICO, LTV and DTI may see interest rates of 3.5% for one and 4.5% for another. This is not uncommon at all.

The data sets provided by the GSEs was for investors to use to evaluate GSE loans for consideration when buying MBS. This is for "greater transparency". B.S.

The data sets are woefully deficient in information and accuracy. 90 day lates for all vintages of GSE loans are currently 2.03%, and have been in past years as high as 5% or more. Yet, when I take the total performance of any vintage, or combined vintages, the highest I can get is 1.25%, and for most, it is .25%

The GSE's have scrubbed the bad loans from the data to such an extent, default rates and conditions cannot be accurately determined.

Furthermore, the ZIP Codes have been "altered" whereby one cannot get down to Zip Code level to determine defaults on a local basis.

The GSEs continue to play their games, like all government agencies do.

================================

About 4 weeks ago, I brought up the problem for banks with repo and hypothecation agreements and funding. It was summarily dismissed as not being of concern. The Fed and the SEC think otherwise.

As we warned here most recently, the shadow-banking system remains the most crisis-catalyzing part of the markets currently as collateral shortages (and capital inadequacy) continue to grow as concerns. In recent weeks, between The Fed, Basel III, and the FDIC, regulators have signalled the possible intent to change risk, netting, and capital rules that could have dramatic implications on the repo markets and now, it seems, the SEC has begun to recognize just how big a concern that could be. As Reuters reports, the SEC urged funds and advisers last week to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance.A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities. Most repos, around 80%-90%, are against government-related collateral and it is the repo market which makes government securities relatively more liquid by allowing fast and efficient financing and short covering. It is not accidental that trading volumes in bond markets are so closely related to the outstanding amount of repos.

Via Reuters,The U.S. Securities and Exchange Commission on July 17 quietly issued new guidance to money funds that spells out the risks they could face if borrowers in the tri-party repurchase market collapse.

"There are a variety of ways in which a money fund and its adviser may be able to prepare for handling a default of a tri-party repo held in the fund's portfolio," the SEC wrote. "Such advance preparation could be part of broader efforts by the money market fund and its adviser to follow best practices in risk management."In a four-page document, the SEC urges funds and advisers to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance.It also calls for funds to consider the operational aspects of managing a repo, and to contemplate whether there are any legal issues that could arise in the event of a repo default.The SEC's guidance comes at a crucial time for the money fund industry. The SEC is weighing controversial new rules that seek to reduce the risk of runs on money funds by panicked investors - a scenario that took place during the financial crisis.The Federal Reserve is separately eyeing a new rule that would force investment banks that rely on risky short-term funding such as found in the repo markets to hold more capital....And as JPMorgan explains,...Regulators have introduced a simple non risk-based leverage ratio framework, i.e. capital over un-weighted assets, as a complement to the risk-based capital framework. The Basel Committee’s revisions to the framework in the 26th of June release relate primarily to the denominator of the leverage ratio, the Exposure Measure.The most significant impact is likely to be on repo markets. As with derivatives, the proposals do not allow netting of collateral, i.e. repos are accounted for on a gross basis in the calculations of the Exposure Measure. Effectively both derivatives and repos are accounted for as loans on a gross basis rather than a securitized net product. In fact the revised guidance is even more punitive for repo transactions as it not only forbids netting of collateral but it does not allow netting of exposure either, i.e. repos and reverse repos cannot be offset against each other.Repos are a $7tr universe approximately across the US, Europe and Japan. This is equal to close to 10% of the $77tr of the reported assets of G4 commercial banks including US broker-dealers. However, off-balance repos as well as accounting reporting which allows for netting between repos and reverse repos under both IFRS and US GAAP as well as collateral netting under US GAAP, means that most of this $7tr of repos is not captured in reported balance sheets, i.e. it is not included in the above $77tr figure of commercial bank assets.If we apply the same 10% to the whole of the $7tr of G4 repos, i.e. we assume that around $700bn is accounted via existing reporting of net repos in banks’ balance sheets, then under the revised Basle proposal which forces reporting of total gross rather than net exposures, the Exposure Measure would increase by more than $6tr. Applying the 3% minimum capital requirement to this $6tr potentially results to additional capital of $180bn across the whole of the G4.These new regulations are hitting repo markets at a time when they are struggling to recover from their post-Lehman slump.

A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities. Most repos, around 80%-90% are against government-related collateral and it is the repo market which makes government securities relatively more liquid by allowing fast and efficient financing and short covering. It is not accidental that trading volumes in bond markets are so closely related to the outstanding amount of repos.

Figure 4 shows that US repo amounts and overall bond trading volumes have been following a flattish pattern in recent years with no signs of a return to pre Lehman levels.While we see a bigger on repo markets, the impact on derivatives markets should not be underestimated. Similar to repos, banks will have to reassess their derivative portfolios and businesses against higher leverage buffer. At a time of rising 'fails', rising leveraged-carry-trades, and no real end in sight for Fed intervention, a repo default contagion could indeed be the self-inflicted wound to bring down the risk-markets in spite of Fed liquidity.

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Comments brainy friend Rick

I would argue that mortgage securitization has played a big role in hampering an efficient foreclosure process because the entity that possesses the contractual remedy of foreclosure has already been paid off by investors who purchased the defaulted mortgage as part of a debt security. These RMBS are usually sold without recourse to the investors except through specific buyback language that is very limited under the terms of the purchase agreement as disclosed in the prospectus. The investors assume the risks of default and prepayment. They become the actual creditors.

However, the creditors never sue the borrowers. The originators or servicers of the loans most frequently sue for foreclosure. But why should they be able to foreclose when neither of those parties has actually been injured by the borrowers’ defaults? A prime example of this mess and confusion is the bankruptcy of Residential Capital (aka GMAC and DiTech Mortgage). ResCap will be cramming down a settlement on its investors for about 10 cents on the dollar on unpaid RMBS liabilities. It sold most of its performing mortgages to Berkshire Hathaway which will collect the future payment streams. It transferred its non-performing loans to its recently formed successor called Ocwen (“Newco” spelled backwards). After screwing the RMBS investors through the bankruptcy, Ocwen will then foreclose on the bad loans and capture as profit all of the proceeds from the forced sales that RESCAP would have been required to pass back to the now-screwed investors.

Because of this and other similar deals on the securitization side, it becomes more understandable why foreclosures have slowed – especially in judicial foreclosure States. Equity (in a legal sense – not the equity in the secured asset) is not with the originators and servicers. Many have the appearance of double dipping – especially when their buyback obligations to the GSE’s or to the private RMBS are settled for pennies on the dollar.

Rick ====================================

Pat responds:

Rick,

You have some common misconceptions about what has gone on and what can be done. Much of the misconceptions are the result of media pundits not knowing what they are talking about themselves. To note:

1. " the entity that possesses the contractual remedy of foreclosure has already been paid off by investors who purchased the defaulted mortgage as part of a debt security." The Contractual Remedy for addressing foreclosure is in the hands of the Servicer or the Master Servicer, per the Trust Master Servicing Agreement. This Agreement covers what is allowed and not allowed.

The Master Servicer and even the Servicer were not necessarily the Loan Originators. In fact, unless you are talking about Countrywide, Indymac, and Aurora originated loans, more often that not, the Originator was not the Servicer. So the "paid off entity" was not necessarily the Servicer.

2. the creditors (investors) never sue the borrowers. Presumably, with this statement, you are referring to going after the borrower for losses after the foreclosure has occurred. This is possible in "deficiency states", but not all states are "deficiency" states. Anyway, the homeowner has already lost the home, which is the biggest asset that they had. What do they have left? Usually nothing. You can't get blood out of a turnip.

If you are suggesting that the Investors sue for foreclosure, then you have the problem that the Investors: 1) Have no authority themselves as bondholders under the Agreements. 2) Who will pay for the actions? The bondholders will not throw in good money after bad. 3) Foreclosure processes are different in all 50 states. That creates issues in that bondholders would need to obtain legal representation in every state, often many different firms. The cost of this litigation would be increasingly expensive, especially with borrower defenses. 4) The investors do not have access to the paperwork that would allow for competent legal action. They would have to file a lawsuit against the Trustee to get the Trustee to obtain the Servicing Records for the foreclosure lawsuit.

3. The investors assume the risks of default and prepayment. They become the actual creditors. Your "investors" are bond holders of the income stream created through a Trust. The Trustee holds the loan in benefit of the Trust. Under the terms of any Agreement, the Investors need a majority of participants to engage in any action. Getting 50% of the investors involved is very difficult, as Patton Boggs has found out. Then, if you can get a majority of them to agree, a lawsuit must be filed against the Trustee to get the Trustee to act. The Investors, per the Agreement, have no authority to act upon their own.

(I asked one CFO of a bank about this situation. He said, and it was correct, that a Trustee would not sue borrowers because there was no money to recover. It would be a waste of resources.)

4. specific buyback language that is very limited under the terms of the purchase agreement as disclosed in the prospectus. I have read Agreements that have covered all the players, at one time or another, and I have consulted for a New York Law Firm attempting to file actions in two different cases, alleging Reps and Warranties issues, including fraud and ability to pay. There are several difficulties in this.

First, obtaining the loan files and having competent people review them is time extensive and costly, especially since Trusts can have from 100 to 8000 or more loans in them. Then, the difficulty exists in getting the loan files to review in the first place. Investors must sue the Trustee to get the Trustee to demand the files.

As to the Reps and Warranties being "limited", I can always find violations if I have access to the loan files. But even then, as Courts have ruled time and again, the Statute of Limitations has expired. More important, the Investors must again sue the Trustee for enforcement of the Reps and Warranties. As one Trustee remarked to me...."Are you nuts? There is no way that we will go after the Originator for Reps and Warranties. We win and we show the way for others to come after us!!!"

5. The originators or servicers of the loans most frequently sue for foreclosure. But why should they be able to foreclose when neither of those parties has actually been injured by the borrowers’ defaults? Again, you have to read the Trust Master Servicing Agreement. It gives the Servicer all rights and authority on behalf of the Trust in all matters concerning foreclosure as long as the actions do not violate IRS regulations. This Agreement includes a General Power of Attorney granting the authority.

6. Ocwen was not recently created as a successor to ResCap. Ocwen has been around since the 90's, funding loans and servicing loans. They only bought the Servicing Rights to the ResCap loans for $3b. Servicing is not ownership. The loans sold to Ocwen were owned by Trusts that ResCap serviced.

7. The Rescap RMBS portfolio were "bonds" that they held. The bonds being held were the result of ResCap securitizations whereby they, as with all lenders, would retain the lowest rated tranches of a Securitization as a "good faith" investment. The real reality is that no one wanted the tranches.

8. Berkshire bought the actual loan portfolio of 47k loans held by ResCap. These included both performing and non-performing loans. Berkshire should collect the payment streams. They now own the loan. Remember, the BK Court approved the transaction.

9. After screwing the RMBS investors through the bankruptcy, Ocwen will then foreclose on the bad loans and capture as profit all of the proceeds from the forced sales that RESCAP would have been required to pass back to the now-screwed investors. This is incorrect as well. Ocwen is subject to the terms of the Master Servicing Agreement as successor Servicer. They will either modify the loans, per the Agreement and a Net Present Value Calculation, or they will foreclose. If they foreclose, they then sell the property, and from the proceeds of the sale, they will deduct their own costs, including any Monthly Payments advanced to the Trust to ensure income flow, late fees payable to them, any and all foreclosure related costs, any property taxes advanced and forced placed insurance. The leftover funds go to the Trust for distribution to the different tranches subject to the different Agreements.

I know that this is true because I have documentation on the amounts of money paid to the Trusts for over 3000 loans. I have also created for my associates a Loss Given Default module so that the potential losses on a loan can be calculated not just at origination, but also on a monthly basis based upon changing borrower characteristics, property value changes, sales time, and foreclosure time, so as to predict potential recovery in line with this.

10. especially when their buyback obligations to the GSE’s or to the private RMBS are settled for pennies on the dollar. See all of the above to rebut this statement.

Pat========================

Pat,

Yes, but the complexity of what you just explained gets in the way of an efficient foreclosure process because the equities are not entirely with the servicers and originators who received monetary consideration in return for their promise to pay the investors an income stream from the mortgages. The perceptions, even though they may be incorrect, cloud the process; hence, many of the interventionist policies find justification.

Rick ==============================

No, it is not the servicers that are in the way. It is the government, at both the state and federal level that is causing the problems.

1. HAMP, initiated in 2009 is a huge problem. If a borrower goes into default, he can DEMAND consideration for a loan modification. The servicer cannot deny the consideration and must consider the person for a mod. The mod process takes several months, even for a denial.

2. Though Private Securitization has different requirements for modifications, HAMP still pushes that a Privately Securitized loan be reviewed and to promote this, it provides monetary for the loan to be considered.

3. Litigation by the Attorney Generals has caused more problems. Now, the processes are set in legal processes.

4. OCC interference with the complaints by homeowners and media has caused further problems.

5. State Statutes like the CA Homeowner Bill of Rights has caused even more problems.

Right now, it takes at least 3 months to evaluate a loan modification request. Two months are spent getting all the documents together is average. One month to review and approval or deny. If the mod is denied, then the borrower gets to appeal the denial, and has 30 days to appeal it. Then it goes back for further review, and the borrower is notified again of the denial. So, what happens then? The borrower submits a new package for review, starting the process over again. And to start it again, a material change must have occurred to change the circumstances of the borrower. This might be as little as getting a $50 per month pay raise, or the value of the home dropping by $10k. When it happens the entire process begins again. But the really sad part is that you only need to look at the Modification Application to know that the borrower will never be able to make the payments, no matter what type of modification occurred, but the whole process must begin again.

( I looked at one file where the loan amount was $450,000. The borrower had lost most of his income, with no hope of regaining it. He could only afford a loan payment at 2%, based upon $85k. Both he and the attorney were pissed that the mod was denied, and they were going to file a lawsuit to stop the foreclosure, and get a modification. To hell with the Investor who would lose in the end over $400k. The homeowner "deserved" his modification, and it was his "right" to have one. This is the b.s. going on stopping foreclosures.)

In 2008 and into 2009, foreclosures were occurring quickly. But homeowner advocates and media pundits used companies like Lender Processing Services, DocX, and MERS as targets to attack to stop foreclosures. This resulted in heavy litigation, and some of these businesses being put out of business. It also caused foreclosures to stop in many states.

One of the favorite arguments by advocates and the media was Robo Signing. I have read the documents in the Trusts which give servicers the right to sign the documents for the Trusts. I have read the MERS membership agreements which provides for the MERS Certifying Officers to sign the documents for MERS. I also have seen the different Power of Attorneys and Corporate Resolutions that allow for these actions. But the fact that the documentation existed which allowed for Robo Signing to occur meant nothing to the advocates because it did not meet their goals.

Yes, shortcuts were taken, but in almost EVERY case, except for a few random situations, the borrowers WERE in default. They had not been prejudiced in any manner. Yet due to various different factors, they were prevented from foreclosure of the properties.

Now, thanks to the government, HAMP loans are being modified, but for the first loans done in 2009, default rates are quickly approaching 50%. Every vintage since is seeing the same pattern occur, and this is before the loans begin to adjust upwards in payment starting in 2014.

Since the government got involved, foreclosures have fallen steadily, but timelines to foreclose has increased to up to three years. It is all because of the government.

Believe me, the servicers would prefer to foreclose and get rid of all the paperwork and files they are working. They would rather foreclose than to modify, because they know that most of the loans that get modified will redefault.

You want to stop defaults? Do principal reductions down to 80% loan to value, and then drop the interest rates on the loan to 2%. That will stop defaults, until the idiot homeowners spend themselves back into the hole, which will happen quickly. But who gets hurt with principal reductions? The Investors or the Taxpayers.

I believe that you misunderstand my point. I am not advocating widespread modifications. Nor am I arguing that securitization is the sole or primary reason for an inefficient foreclosure process. I am pointing out that securitization obscures the parties and the clarity of the loan contract because the originator (formerly known as the lender) transfers his risk to the owners of RMBS in order to leverage capital. Thus, at the time of many foreclosures, the originator is not really out any money by virtue of the borrowers’ defaults. The originator has a contingent liability to the investors that may or may not be guaranteed by a GSE. Or the GSE may be left holding the bag with only a buyback claim against the originator. There are many permutations to this situation.

Many outsiders balance the potential losses to creditors and investors against the benefits received by the creditor from securitization. Also, they balance those potential losses against the losses incurred by the homeowner who loses dollar for dollar any capital that he or she brought to the closing. And they balance them against the losses to an originator that has used the same capital 20 times to make 20 different loans most of which are still performing. This is what I mean by the equities not being completely with the party seeking foreclosure. And each case stands on its own facts. In many cases, fairness will require foreclosure. In some other cases, fairness should require modification or rescission. My only point is that one unintended consequence of securitization is that it obscures the real parties in interest and complicates what used to be a simple, straightforward transaction; i.e., a loan in which the borrower gives the lender a security interest (mortgage) in real estate as additional consideration for the loan and the lender’s sole assumption of the risk of default. Thus, I understand why many politicians and judges have tried to make it more difficult for all lenders to foreclose. The fact that I understand their reasoning does not mean that I agree with any of their policies.

I very much appreciate Marc bringing in these discussions and I have learned to value the wisdom and knowledge that pp is bringing us on housing. One important point I would make that Pat already nailed:

"Existing Home Sales is much more important than New Home Sales."

When new home construction rebounds it is a positive factor in employment, in the the context that these increases come from a level of near zero during the crisis. In housing values, more new homes means more supply so it is actually a negative factor for existing home values. If construction is up based on artificially and temporarily low interest rates, that makes the so-called general recovery even more suspect.

A key point both Rick and Pat agree on: foreclosure blockage is a bad thing for the market. Posted by Pat previously, "If government would get out of the way and let "natural actions" clear the market, housing recovery would be shortened considerably."

Politically, it sounds so caring for the government to step in and stop the big bank lender from taking back the collateral that was offered as security on a defaulted loan. But for a free market to exist for housing, intervention tears down the foundation. Lending on housing happens because the loan is 'secured'. But when we demonstrate willingness to void the terms of a valid, private contract using a boldly, interventionist government based on economic conditions and political whim, up goes the risk and down goes the desirability of making those loans in the future.

Ask yourself, what was the difference between the US economy in its greatness and a third world country with no investment and zero growth and I think the answer is consistency in the rule of law. People could enter into long term contracts and investments with the expectation that money will still be money years later, and contracts will be enforceable. We keep chipping away at the cornerstones of our success without noticing the consequences.

Here is some info to show all how screwed up things are. These are Default Percentages of Loans originated through the GSE's in 2008 and 2009. By that time, underwriting had tightened considerably, but there were still high LTV loans being done.

With the data, you can see the impact that low credit scores had on Default Percentages, but there are contrary indications that don't make sense at first. What I am doing is evaluating a 15m loan data base from Freddie to understand why the outliers exist, the causes of such, and how my new scoring model can account for those factors. Additionally, I and others are engaged in taking this data, using it to determine default risk probability, and then use the data to identify Tier 1 & 2 Capital requirements for banks under BASEL III. The bad part is that I am not getting paid for this yet. That only occurs when we roll everything out next month, and then start signing up banks. At that point, my Patents Rights and Royalties kick in. But until then, I am eating beans, without the ham hocks.

With this data, notice the increase in Default % for the 720 bracket. This is purely a result of the high DTI. Probably, it also means that the loan amounts were lower than $200k and presents a small positive Cash Flow after living expenses are considered.

For the under 640 bracket, notice the consistent high default percentages. Typical of that credit profile.

This data shows the nexus of DTI to FICO, especially when loan amounts are smaller and not larger.

At the 75-85% LTV, Defaults have increased across all cohorts. This is the stronger influence of the higher LTV at work. This is in line with studies that indicate the higher the LTV, the greater the risk. A likely reason in this case is that many of the homes dropped in value from origination, preventing an ability to "exit" the loan as finances got worse. Positive cash flow would be an issue with the DTI above 40%, for many of the loans.

This chart offers an interesting observation. With it, defaults from 719 and lower have remained reasonably steady. This suggests that that there might be a "Cap" at some level for increased default risk. (Means I have more research to do to figure this out. For the 720 and up group, we see that the influence of DTI is being felt more. Also, with the higher LTV, the possibility of exiting the loan through refinance or selling the property may have diminished, leading to a higher default rate.

The 95 plus LTV group has thrown me for a complete loss. Default rates have fallen for the 640 and above credit scores. Yet, they essentially remain the same for the 639 and lower scores. From a risk viewpoint, we know that 95% plus LTVs have a much greater default rate than the 85-95 group, but this does not reflect that reality.

Different factors may come into play, from the volume of such loans being much lower, whether a purchase or cash out refinance, to even regional differences of where the homes are. But without in depth analysis, who the hell knows. Or there could be one or more of 28 other factors that play a role in default risk.

Additionally, has HAMP played a part as well? Or the offering of Short Sales before a person went into default?

The good news is that the number of defaults have fallen in the 2010 and 2011 vintages, but they have one to two years less performance to evaluate. Additionally, they were subjected to more stringent underwriting, than in 08 or 09. But defaults are surely going to rise, especially when the Fed quits QE, and also when HAMP loans begin to experience interest rate increases in 2014.

Understanding this data is critical for the banks. Under BASEL III, Loan Risk is a key factor in determining Capital (iow, shareholder equity) requirements for liquidity and loss purposes. Banks have to increase their Capital from 6 to 8%, based upon risk calculations. But the problem is quantifying risk, and that is what I am engaged in now.

This article shows the unintended effects of the Fed pushing rates down. People have now come to expect low rates, especially those who have no experience with mortgage lending in the past.

Not only will this have a negative effect upon new home sales and also re-sales, but it goes towards supporting my previous points that the low interest rates so many homeowners currently enjoy will "enslave" them to their homes, removing them from the move up market.

What a difference a percentage point makes. A slight rise in U.S. mortgage rates—the average for a 30-year fixed mortgage inched from about 3.3 percent in May to 4.3 percent this week—is spooking would-be home buyers and complicating forecasts for builders. Much to the agony of those builders, younger consumers appear transfixed by the shockingly low rates of recent years without paying any mind to historical mortgage norms.

Skittish buyers have become more worried about rising rates than they are about surging home prices, according to a new survey from real-estate data company Trulia (TRLA). Some 41 percent of respondents cited interest rates as their top concern, compared with 37 percent who pointed to prices. “We did anticipate that it would be a big concern; we just didn’t realize quite how much,” says Trulia spokeswoman Daisy Kong. “Low interest rates were the one thing people were able to count on for a while.”

And financing jitters aren’t just showing up on studies—those anxieties were abundantly evident in a round of reports from big U.S. homebuilders this week. D.R. Horton (DHI) posted only a 12 percent increase in new orders for homes from the year-earlier period, less than half the amount expected, while PulteGroup (PHM) saw its orders drop 12 percent. “A lot of buyers were counting on trying to pick the low in the pricing and the low in the interest rates,” D.R. Horton’s chief executive, Donald Tomnitz, said on a conference call.

Executives have tried to downplay the fallout in their earnings presentations, arguing that a lot of things are worse than rising rates. A supply shortage, for one. A crummy economy, for another. “As an industry,” PulteGroup CEO Richard Dugas says, ”we can sell more houses if more people have jobs, even with modestly higher rates.”Investors haven’t been reassured, sinking shares of both homebuilding companies. Barclays analysts this morning downgraded builders across the board, cutting its assessments of seven companies in all. “Interest rates will have a more significant effect on builder fundamentals than we had previously thought,” they wrote.

So what can homebuilders do? They can try giving their potential customers a history lesson. First-time buyers are far more likely to balk at interest rates, and those newbies probably have little idea how steep rates can get. When mortgages flirted with 20 percent in the early 1980s, these folks were watching He-Man and playing with Cabbage-Patch Dolls.

The whole industry needs to channel every crotchety grandpa who ever made a speech starting with “in my day,” only with a message that actually proves effective with millennials who might be on the market for a home. If done well, financing at 5¢ on the dollar will look like cheap money.

=================

For homeowners in a low interest rate loan, they really are "stuck" when rates rise. Consider that the interest rate differential between what so many refinanced into and what is considered normal is at least 2%. As rates go up to this level, the following occurs:

1. Buyers are priced out of the market, so sellers must drop their pricing to meet the new reality of what buyers can afford.

2. Drop in home values create a negative equity or near negative equity position for current homeowners so that they cannot sell. (Right now, combined, the near and negative equity homeowners are about 55%, if latest estimates are correct. Imagine what even a 10% drop in values will do to this number.)

3. If they can sell, they haven't enough money for a 20% down payment in most cases, and that will make the loan even more costly, with the addition of PMI. That increases the Debt Ratio significantly.

4. Then, if they can sell and buy, the drop in home values of the new property must be such that it offsets the higher interest rate.

To add to this mess, far too many homeowners have debt ratios that are far and above what is now considered acceptable, when consumer debt is added to the housing debt. They would not be able to meet the new guidelines, and thus would be denied.

What most people ignore, probably purposely, are the relationships between different factors that affect housing, whether borrower characteristics, lending issues, population demographics, etc. A change in one factor creates a "tidal wave" effect across the board. Just like a tidal wave begins with a 6 inch wave and grows, the same exists with housing.

Notice how the NAR is trying to spin the news. Especially the last paragraph. The lack of investors will lead to higher prices? What planet are they on? It has been the investors who have caused prices to increase. The whole article is about spin.

Rising interest rates constrain pending home sales

After reaching a six-year high, pending home sales fell in June.

The decline in pending home sales is attributed to rising mortgage interest rates, which are beginning to impact the housing market, the National Association of Realtors reports.

NAR’s Pending Home Sales Index edged down 0.4% to an index score of 110.9 in June, dropping from a downwardly revised 111.3 in May. From last year, the index is up 10.9%.

"Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June," said NAR chief economist Lawrence Yun.

He added, "The persistent lack of inventory also is contributing to lower contract signings."

On the upside, pending sales have been above year-ago levels for the past 26 months.

"Despite an increase of about half a percentage point for mortgage rates in June, however, the index remains at a high level (other than in May, the index is at the highest level since the end of 2006)," Berson stated.

He added, "This suggests that reported home sales will remain strong for the next couple of months (especially when combined with the large jump in the Index in May)."

Meanwhile, not all pending sales contracts are closing.

The issue is that there are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates.

"Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their mind if the rate rises too much, which apparently happened with some sales scheduled to close in June," Yun explained.

As a result, closed sales are expected to edge down in the months ahead, but will stay above year-ago levels, according to NAR's chief economist.

The PHSI in the Northeast remained unchanged at 87.2 in June but is 12.2% above year ago levels.

In the Midwest, the index slipped 1% to 114.3 in June and is 19.5% higher than in June 2012.

Pending home sales in the South fell 2.1% to an index score of 118.3 in June, up 9.5% from a year ago.

Meanwhile, the index for the West jumped 3.3% to 114.2 and is 4.4% above year ago levels.

Existing-home sales are expected to rise more than 8% for the remainder of the year.

Additionally, investor shortages will lead the median home price to rise by nearly 11% this year, NAR concluded.

Here we go again. Richmond, the Bay Area crime capital, murder capital per capita, haven for gangs and drug dealers, is now going to try Eminent Domain to take underwater properties and sell them back to the homeowners, after screwing the investors.

This is a scam being perpetrated by Mortgage Resolution Partners, former mortgage brokers who now have a group of investors. They and Richmond are essentially putting together a program whereby they will "steal" the properties from legitimate investors, and then earn a substantial profit when they take the home for 80% lf LTV, and then write down the underwater part of the original mortgage to 95%. Then the borrower refinances into a 95% ltv loan.

Outside of theft, here are the other aspects.

1. No defaulted loans allowed. The borrower must be current, and probably have good credit.

2. With 95% loan to value, the borrower must have cash to close to keep the 95% ltv. How many have the funds?

3. The loans would most likely be run through FHA. Most GSE products would probably decline the loans.

4. It is the original investors in MBS who get screwed. GSE loans will not be touched. Banks might also be on the target list.

5. Mortgage Resolution Partners make all the money.

Of course, the mayor of Richmond is a former school teacher. She has no clue about the law, and the consequences of such as action. You want to ruin Private Lending in the future, then watch what happens if Richmond succeeds.

Pat

A City Invokes Seizure Laws to Save Homes

The power of eminent domain has traditionally worked against homeowners, who can be forced to sell their property to make way for a new highway or shopping mall. But now the working-class city of Richmond, Calif., hopes to use the same legal tool to help people stay right where they are.

An abandoned home in Richmond, where roughly half of all homeowners with mortgages are underwater, meaning they owe more than their home is currently worth.

Scarcely touched by the nation’s housing recovery and tired of waiting for federal help, Richmond is about to become the first city in the nation to try eminent domain as a way to stop foreclosures.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.

But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.

“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”

Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

But the cities face an uphill battle. Some have already backed off, and those that proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began working to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.

“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”

Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

All of the loans in question are tied up in what are called private label securities, meaning they were bundled and sold to private investors. Such loans are generally the most unfavorable to borrowers and the most likely to default, Mr. Gluckstern said. But they are also the most difficult to modify because they are controlled by loan servicers and trustees for the investors, not the investors themselves. If Richmond’s purchase offer is declined, the city intends to use eminent domain to condemn and buy the loans.

The banks and the real estate industry have argued that such a move would be unprecedented and unconstitutional. But Mr. Hockett says that all types of property, not just land and buildings, are subject to eminent domain if the government can show it is needed to promote the public good, in this case fighting blight and keeping communities intact. Railroad stocks, private bus companies, sports teams and even some mortgages have been subject to eminent domain.

Opponents, including the Securities Industry and Financial Markets Association, the American Bankers Association, the National Association of Realtors and some big investors have mounted a concerted opposition campaign on multiple levels, including flying lobbyists to California city halls and pressuring Fannie Mae, Freddie Mac and the Federal Housing Administration to use their control of the mortgage industry to ban the practice.

Tim Cameron, the head of Sifma’s Asset Management Group, said any city using eminent domain would make borrowing more expensive for everyone in the community and divert profits from the investors who now own the loan to M.R.P. and the investors financing the new program. “Eminent domain is used for roads and schools and bridges that benefit an entire community, not something that cherry-picks who the winners are and who the losers are,” he said.

Representative John Campbell, Republican of California, has introduced a bill that would prohibit Fannie, Freddie and the F.H.A. from making, guaranteeing or insuring a mortgage in any community that has used eminent domain in this way. Eminent domain supporters say such limits would constitute a throwback to the illegal practice called redlining, when banks refused to lend in minority communities.

Opponents have also employed hardball tactics. In North Las Vegas, a mass mailer paid for by real estate brokers warned that M.R.P. had “hatched a plan to make millions of dollars by foreclosing on homeowners who are current on their payments.”

In a letter to the Justice Department, Lt. Gov. Gavin Newsom of California complained that the opposition was violating antitrust laws and that one unnamed hedge fund had threatened an investor in the project.

But not all mortgage investors oppose the plan. Some have long argued that writing down homeowner debt makes sense in many cases. “This is not the first choice, but it’s rapidly becoming the only choice on how to fix this mess,” said William Frey, an investor advocate.

Mr. Frey said that the big banks were terrified that if eminent domain strategies became widespread, they would engulf not only primary mortgages but some $450 billion in second liens and home equity loans that are on the banks’ balance sheets. “It has nothing to do with morality or anything like that, it has to do with second liens.”

Many of the communities considering eminent domain were targeted by lenders who steered minority families eligible for conventional mortgages into loans with higher interest rates and ballooning payments. Robert and Patricia Castillo bought a three-bedroom, one-bathroom home in Richmond because their son, who is severely autistic, would anger landlords with his destructive impulses. They paid $420,000 for a home that is now worth $125,000, Mr. Castillo, a mechanic, said.

They have watched as their daughter’s playmates on the block have, one by one, lost their homes. But they are reluctant to walk away from the house in part for the sake of their son.

“We’re in a bad situation,” Mr. Castillo, 44, said. “Not only me and my family, but the whole of Richmond.”

The US housing market can no longer be painted with one brush, as the housing recovery is playing out very differently across the country. Here are some anecdotes gleaned from our consulting team...

Florida on sale to the world.Investors, investors, and investors. From Russia to China to the UK to Brazil, Florida is attracting investors from all over the world. Domestically, the institutional single-family renters are competing with local flippers, too. Good finished lots are now at peak prices in several markets. The active adult/retiree markets continue to experience strong growth.

North Carolina slows after surge.After a strong Spring housing surge, growing builder competition and a lack of fundamental economic growth are tempering local housing market recoveries. Dwindling lot supplies have also put pressure on builders to get ahead of the pipeline and self-develop communities to maintain volumes.

DC moving South and West. New home sales have remained fairly steady since the March 1 start of sequestration. The sequestration impact has been less than expected with buyers still purchasing homes but choosing smaller units or spending less on options and upgrades. Entry-level builders in particular are working closely with buyers who think they may be impacted by budget cuts. Land inventories in the Washington, DC metro area are limited, and the market is expanding southward and westward.

Texas economy is growing big!Entry-level buyers are struggling more here than other places, but that is always the case in Texas. The strongest economies in the country just seem to keep getting stronger, with a notable increase in license plates from other states. The continued economic growth and relocation demand has pushed land, lot and home prices to all-time highs. Apartment construction is booming. Houston is now the largest housing market in the country. In Austin, finished lots in A markets such as Cedar Park and west Austin are becoming more challenging to find, and residential development is migrating northward and westward into regions that had historically been considered B submarkets.

Midwest coming back to life. Once the Midwest thawed out in April, the housing market thawed out as well. Job growth continues to improve, as do sale volumes. Pricing improvement is right around the corner. Builders in both Minneapolis and Chicago are now running out of desirable lots and are seeking viable development opportunities.

Phoenix temperature cooling. The white-hot land market in Phoenix may be cooling off. Homebuilders in the A markets are pausing to carefully consider land prices, after 12 months of rapidly escalating prices. Builders are still pursuing deals but are mindful of the impact of rising mortgage rates and price increases on price sensitive buyers. With temperatures over 100 degrees, it is tough to ascertain true demand in Phoenix right now.

Vegas showing some rate sensitivity. With most of the land around Vegas owned by the government, Las Vegas land supplies remain limited, and builders continue to search for finished lots. Prices for land continue to rise with public homebuilders dominating the Las Vegas market and aggressively bidding on residential land. In the last few weeks, we are starting to see a little pullback with rising cancellations.

Georgia joins the recovery. The Atlanta housing recovery has officially begun this year, as soaring demand continues in the popular Golden Triangle of North Atlanta. Supply constraints in the north are driving up lot values, especially as the market begins to shift from distressed lot transactions in exurban sprawls to new development within core A and B submarkets. Foreclosure buyers have been big contributors to the recovery.

Northern California in sticker shock. New home prices may have risen too much in the Bay Area, where consumers have pulled back due to sticker shock. While sales are still strong and price increases still common, rising mortgage rates and the remarkable appreciation of the last year-plus has left many potential buyers behind. Though the most desirable new home communities can simply move down their interest list with each new release, a general slowdown in appreciation is inevitable.

Riverside is again driven by coastal pricing. Rapidly rising prices in Coastal Southern California markets are pushing more buyers back into the more affordable inland markets of Riverside and San Bernardino Counties, where sales are surging. Sales rates of 6 to 8 sales per project per month are common in A markets like Corona and Eastvale. Land prices are skyrocketing in the close-in markets, rising over 25% in just the last six months.

Orange County supply is rising. The birthplace of large-scale small-lot masterplans is exploding, with a plethora of new home communities recently opening. Sales are strong and driven by a significant number of foreign buyers who are moving in.

Seattle expands outward. Homebuilding is pushing out of King County. New home and lot prices in South Snohomish have soared over the last 12 months, and homebuilders are showing an increased appetite for land south of Seattle in Pierce County. As evidence, consider that Tehaleh in Bonney Lake, by Newland Communities, is now the best-selling masterplan in the metro area.

"At this pace, the Fed will soon accomplish their unstated goal of eliminating negative equity, which will allow for refinancing that will be great for the economy."

This is an absurd statement. HARP already allows for Negative Equity financing, so who needs to artificially inflate values to eliminate negative equity again. Inflating the values will only serve to prolong the housing crisis.

If you want to eliminate negative equity for refinancing, then you have to inflate to cover 25% of the homes with a mortgage. This means another 10-20%. But, that now means that you price buyers out of the market with the higher values.

This is a firm that does Real Estate Consulting? Sounds like they are an off shoot of the NAR.

Yes, he believes the private sector is the solution. The only indication that he is lying is that his lips were moving when he said that - and that everything he has done as President, Senator and community activist before that has been to the contrary.

I was in a meeting yesterday when this came out and the comments were not positive. Everything he said was contradictory or worse.

1. He wants to replace Fannie and Freddie, but the legislation appears to support the creation of "smaller" entities that would act like the GSE's. Guess who would likely run them.

2. He wants to replace the GSE guarantees with a new Federal Guarantee program, that would step into play after certain investor losses had occurred. Just a "vague" notion with no flesh.

3. He wants to keep rates low like right now for "affordable housing" for the poor to buy, and with 30 year mortgages.

This is all smoke and mirrors. Investors will not purchase loans that have such low interest rates especially over 30 years with the high risk involved. The losses would wip them out from defaults, even if higher inflation did not.

Also, the GSE's have bought their way to power through campaign donations. They will continue to do so and will likely never disappear.

There is no system in place to replace the GSEs. Private investment which would have to supply the funds will not buy the loans without an ability to determine what they are buying. This ability does not exist at this moment because the lenders haven't the ability to determine default risk, probability of default, loss given defaults or ongoing risk assessment on products at this time. And banks cannot portfolio lend because of these same reasons, and also because of BASEL III requirements.

IBD Editorial confirming what Pat just posted. If he is saying this, he is doing the opposite.

Another Obama Head Fake On Fannie, Freddie Reform 08/06/2013

Big Government: President Obama is renewing calls to reform Fannie Mae and Freddie Mac. But it's just another ruse to prevent these costly government failures from being privatized.

While outlining his plan Tuesday in a housing speech in Phoenix, Obama proved he's the master of talking out of both sides of his mouth.

In one breath, he encouraged the private market to take a bigger role in home lending, and even suggested the government's role should be limited.

Yet in the next, he argued the government still plays a vital role in the mortgage market by guaranteeing "affordable housing" for lower-income Americans.

Then he talked about how he wants to "strengthen" the Federal Housing Administration, by which he means expand its role in the affordable housing market. FHA has already picked up the subprime slack from Fannie and Freddie on his watch.

Now Obama seeks to further expose it to risky subprime loans by qualifying deadbeat borrowers with foreclosures and bankruptcies. Obama also prattled on about personal "responsibility," and making sure those who want a home can actually afford one.

Yet instead of making deadbeat borrowers wait three years to apply for another home loan, Obama is ordering FHA to back such high-risk loans right now, as long as the borrowers have a job and take credit counseling.

He also linked housing reform to immigration reform, arguing that immigration can stimulate the housing market. But in the run-up to the crisis, thanks to government pressure on Fannie and Freddie, millions of Hispanic immigrants — many here illegally — took out home loans with no down payments and weak or no established credit, and defaulted on those loans in droves.

We've heard this from Obama before. In February 2011 he put forth a plan to "reform" Fannie and Freddie. Then as now, he vowed to wind down the toxic twins in favor of a private market solution — with a big caveat.

"Any such changes should occur at a measured pace," the president said in his 30-page report to Congress, "that preserves widespread access to affordable mortgages." He also asserted: "The government still has an important role to play in housing finance."

Two-and-a-half years later, he's still dragging his feet.

Despite prespeech headlines trumpeting "an end to Fannie and Freddie," Obama did no such thing.

Indeed, he offered no specifics about how he would actually unwind the nationalized mortgage giants — which so far have cost taxpayers $190 billion in bailouts, thanks largely to federal affordable-housing mandates that drove them into the subprime market.

If Obama truly were serious about reforming housing finance, he wouldn't have tapped Democratic Rep. Mel Watt to be the nation's top housing finance regulator.

Watt teamed with Democratic Rep. Barney Frank to pressure Fannie and Freddie to underwrite high-risk loans to satisfy their affordable-housing social agenda.

Obama in his speech says he wants to lay a "rock-solid foundation" in home lending to prevent another crisis. But he really only cares about "affordable housing" and carrying out his social agenda.

Have you bought a foreclosure in CA? Do you think that you own the property? Think again! You may not.........

A case has been winding its way through the courts for several years. The case, Glaski v Bank of America, was contesting the legality of foreclosures in CA, based upon New York Trust Law, which cites that the loan must be assigned to the Trust prior to the closing date of the Trust, or it never made it into the Trust. If it never made it into the Trust, then the Trust has no legal standing to foreclose.

CA courts are now split on this opinion and chaos is sure to reign until the 9th Circuit and eventually the US Supreme Court rules for or against. In the meantime, over 50% of all foreclosures, past, present and future are now affected by this. Here is what a mess it is.

The Investors have paid cash for the bonds, which was paid to the Depositor who organized the Trusts. Per agreements, they would be the owners now, but that poses issues.

1. Large numbers of Depositors are out of business.

2. If the Depositor is in business, they have been paid for the loan, so they are trying to foreclose on a property that they no longer have any financial interest in having been paid. How do you foreclose on a loan that you have been paid on?

3. All Servicing Agreements between the Servicers and the Trusts are now void, so Servicer actions are unlawful, and they have no ability to collect for the Trust. Assignments, Reconveyances, etc are void when executed by the servicer.

4. One could argue that the Sponsor who sold to the Trusts were the new owners, but most are out of business. Those left in business have been paid off as well.

5. Next, you look to the Originator, but they have also either gone out of business, or have been paid off.

6. If the Assignments are void, then half the foreclosures in CA are likely void. The buyers of those properties are now in limbo. They don't own the properties. And the liens securing the loans are void, so the Notes are unsecured.

7. Title companies are now completely at risk, providing title insurance on properties that are now clouded, and the companies may have to finally start paying out claims.

8. Foreclosure Homes Sales are now at risk.

I have been waiting for this type of ruling. I know how to defend against it, if given the opportunity.

The small city of Richmond, California has some big ideas about seizing private property, and now it also has a big lawsuit on its hands. This is what happens when politicians use government power to help themselves and their private financial partners at the expense of others.

Last week the Bay Area city became the first in America to say it intends to use eminent domain to seize private mortgages whose value is higher than the current value of the homes they helped to buy. The city wants to force mortgage companies to sell loans on 624 properties, and if they refuse the city is threatening to seize the loans by brute government force.

Richmond wants to refinance the loans through the taxpayer-backed (and broke) Federal Housing Administration, pool them into a new security, and sell them to other private investors. Homeowners will get a free principal reduction, and the politicians will claim they eased the financial burden on borrowers.

The biggest winner will be Mortgage Resolution Partners, the San Francisco-based "community advisory firm" that came up with this idea, has been pitching it around the country, and will earn a fee on the repackaged mortgages. The losers will be investors who currently own the mortgages and are unlikely to receive fair-market value from the city. If the city does pay market value, Mortgage Resolution Partners might not make a profit with its loan rebundling.

Which is where the lawsuit comes in. Three mortgage-bond trustees sued on Wednesday in federal court to block the property seizure as unconstitutional. They have a good argument. The Constitution's Fifth Amendment says eminent domain must be for "public use," but in this case the property seizure would benefit private, often out-of-state investors.

Richmond claims the public purpose is to reduce the number of foreclosures and thus help neighborhoods battered by the housing bust. But the city can't know how many foreclosures there will be because more than two-thirds of the 624 are still current on their monthly payments. Other Richmond homeowners may also have to pay a premium for future home loans due to the new political risk to lenders imposed by Mayor Gayle McLaughlin.

All of this echoes the 2005 Kelo case when New London, Connecticut, seized private homes to clear land so Pfizer Inc. PFE +0.27% could build a research headquarters. Susette Kelo lost her home but Pfizer later abandoned the city. In a notorious 5-4 decision, the Supreme Court blessed the seizure, but we wonder if swing-vote Anthony Kennedy would do the same today. The lawsuit against Richmond says the city's claim to help the local economy is merely a pretext to benefit private investors, and such pretexts are a key issue in Fifth Amendment property-rights cases.

By the way, the plaintiffs include Fannie Mae and Freddie Mac, the government-run mortgage giants that buy mortgages in bulk and could be expected to lose big if other cities follow Richmond's lead. Several cities have expressed interest, including Seattle and Newark, N.J. So taxpayers who bailed out Fan and Fred have a stake in the lawsuit against Richmond.

The largest irony here is that the housing market is finally making a recovery. Last week's second quarter GDP report showed that investment in housing grew by 13.4%, following 12.5% in the first quarter. Leave it to politicians and their financial cronies to interfere with progress.

"...This is what happens when politicians use government power to help themselves and their private financial partners at the expense of others."

- The only thing worse than totalitarian, oppressive government is when government pretends to keep a 'private' sector but engages in 'public-private partnerships'. Cringe and fight back when you hear any of these terms.

"Richmond claims the public purpose is to ... "

The rest of that sentence is lie, spin or just doesn't matter. It is not public use. It was the Supreme Court that violated the constitution. The public purpose now is that local authorities were granted the power to choose one private owner over another private owner anytime, any place, on any scale for any reason.

"All of this echoes the 2005 Kelo case when New London, Connecticut, seized private homes to clear land so Pfizer Inc. PFE +0.27% could build a research headquarters. Susette Kelo lost her home but Pfizer later abandoned the city. In a notorious 5-4 decision, the Supreme Court blessed the seizure, but we wonder if swing-vote Anthony Kennedy would do the same today. The lawsuit against Richmond says the city's claim to help the local economy is merely a pretext to benefit private investors, and such pretexts are a key issue in Fifth Amendment property-rights cases."

- That's right!

Even if we had no constitution that had been tromped all over here, does no one believe anymore that a free market with free people making free choices is better than central government control where the powerful can transfer property and advantages to cronies with no limits?

In our town, besides the takings against me, the big project was the Best Buy headquarters where they chased out smaller, independent private businesses in favor of Fortune 500 fame and clout. Now the story is losses, layoffs and closures. The point isn't that the government was wrong with Pfiser in New London, Best Buy in MSP or a GSE buyout in Richmond, it is that they are always wrong to pretend central planners know economic need better than letting scarce resources flow to their most productive use in a free market.

Mortgage Bubble Investigation Needs InvestigatingIn another Friday night news dump, the Obama Justice Department admitted that it cooked the books on its mortgage fraud investigation. A year-long initiative run by the Mortgage Fraud Working Group sought to get to the bottom of some of the fraud that caused the mortgage bubble. It claimed it had charged 530 people with mortgage fraud, which allegedly victimized 73,000 people. After Bloomberg reporters dug deeper, however, the Justice Department was forced to admit that they grossly overstated the numbers. It wasn't 530 people charged, it was 107; and it wasn't 73,000 victims, it was 17,185. Naturally, they chose Friday night to correct the record.Columnist Ed Morrissey wrote, "As it turns out, the original figure included people prosecuted or just sentenced in the same fiscal year, even though they had been charged with crimes long before the MFWG came into being. The victims were not limited to distressed homeowners, as the DoJ had originally claimed, and as Eric Holder himself bragged." Nor was this Eric Holder's first time in book-cooking class -- a similar thing happened in 2010 with the president's Financial Fraud Enforcement Task Force called "Operation Broken Trust."

"As it turns out, the original figure included people prosecuted or just sentenced in the same fiscal year, even though they had been charged with crimes long before the MFWG came into being. The victims were not limited to distressed homeowners, as the DoJ had originally claimed, and as Eric Holder himself bragged." Nor was this Eric Holder's first time in book-cooking class -- a similar thing happened in 2010 with the president's Financial Fraud Enforcement Task Force called "Operation Broken Trust."

"Operation Broken Trust." We've found the real slogan for the Obama administration.

WASHINGTON—Of all the temporary patches the U.S. government slapped onto the sinking financial system in September 2008—from pumping money into banks to rescuing insurer American International Group Inc. AIG -1.01% —none was more urgent to then-Treasury Secretary Henry Paulson than saving mortgage giants Fannie Mae FNMA +0.81% and Freddie Mac FMCC -0.88% .[image]

"It was the single most important thing we did to prevent disaster—real disaster," said Mr. Paulson in a recent interview. But five years later, he adds, "it didn't occur to me that we'd be here with nothing done."

"Rep. Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee, is moving forward a bill to wind down Fannie and Freddie over five years and cede their roles to the private sector."

Good to hear there is such a proposal. Too bad that the do nothing alternative has all the momentum.-------------------------

Soon we will mark the fifth anniversary of the financial crisis that wrecked our economy, left millions of Americans unemployed and from which we have yet to recover.

From a public policy perspective, the great tragedy of the financial crisis was not that Washington failed to prevent it, but that Washington helped lead us into it. The crisis largely started with a noble intention: Every American should own a home. The result was that well-meaning but misguided policies — principally the “Affordable Housing Goals” of Fannie Mae and Freddie Mac — either strong-armed or enticed financial institutions into loaning money to people to buy homes they sadly couldn’t afford. In fact, over 70 percent of the nontraditional mortgages that led to the crisis were backed by Fannie, Freddie and other taxpayer-subsidized programs.

In typical fashion, Washington responded to the crisis by passing a 2,000-page bill that did more to exploit the crisis than solve it.

Today, because it did not solve the problem, taxpayers have been forced to pay for the mother of all bailouts — nearly $200 billion for Fannie and Freddie. That’s unimaginable.

Today, taxpayers remain on the hook for more than $5 trillion in mortgage guarantees, roughly $45,000 per American family. That’s unconscionable.

Today, the federal government has a virtual monopoly on the housing finance system, enabling Washington elites — similar to those at the IRS — to control who can qualify for a mortgage. That’s unfair.

Americans deserve better.

We deserve a system that protects current and future homeowners so every American who works hard and plays by the rules can have opportunities and choices to buy homes they can actually afford to keep.

We deserve a system that protects hardworking taxpayers so they never again have to bail out big government-sponsored corporations like Fannie Mae and Freddie Mac or even those who irresponsibly bought expensive homes they couldn’t afford.

We deserve a system that finally breaks the Washington-induced destructive cycle of boom, bust and bailout.

That’s why the House Financial Services Committee, which I chair, recently approved the PATH Act — the Protecting American Taxpayers and Homeowners Act. The PATH Act creates a sustainable housing finance system by limiting government control, putting private capital at the center of the mortgage system and giving homebuyers more informed choices about their mortgage options.

With the PATH Act, we end the bailout of Fannie and Freddie and phase out their failed taxpayer-backed business model.

The PATH Act also protects the Federal Housing Administration, which is so overextended that it is heading for its own bailout. Today, FHA can use taxpayers to insure mortgages for millionaires and homes valued as high as $729,750. We return FHA to its traditional mission: serving first-time homebuyers and those with low and moderate incomes, as well as ensuring it will be able to insure loans to any qualified borrower if ever faced with another economic crisis.

Others, including some who profit from the status quo, have discussed different reform plans. I welcome them, but all of us must be careful. We cannot allow a plan to become law that simply puts Fannie and Freddie in the federal witness protection program, gives them cosmetic surgery and new identities, then releases them upon an unsuspecting public. We can no longer allow Wall Street investment firms to offload their credit risks on Main Street taxpayers under the guise of promoting homeownership.

No, America needs real reform and a healthier economy. The best housing program is not a subsidy, guarantee or tax credit; it is a good job in a growing economy. The PATH Act will strengthen our economy. It is our path toward real reform and a truly sustainable housing finance system that’s built to last.

- Rep. Jeb Hensarling, R-Dallas, represents the 5th Congressional District and is the chairman of the House Financial Services Committee. He may be contacted through hensarling.house.gov.

I posted previously my (wrongful) belief that housing values will not rebound until incomes go up. But this 'recovery' is happening without accompanying increase in income. As housing again becomes unaffordable, maybe we can start some more new federal programs to help the lower 98% borrow what they can't afford, instead of growing the economy...

In looking at the current trend, since July 2012, the median sales price of a newly constructed home in the United States has gone up by just over $25 for every $1 that median household income in the United States has increased. That's almost 20% faster than the $21-to-$1 rate that the first U.S. housing bubble inflated on average from November 2001 through September 2005....Since 1967, median new home sale prices in the U.S. have typically increased by anywhere from $3.37 to $4.09 for every $1 increase in median household income in the absence of any periods of bubble inflation or deflation in U.S. housing markets.

The Obama Administration has tried for years to oust career employee Edward DeMarco from the helm of the Federal Housing Finance Agency (FHFA), the chief regulator for Fannie Mae FNMA -8.68% and Freddie Mac. FMCC -9.40% The idea is to get a loyalist in charge who is more willing to take political orders. The latest White House nominee is coming up for a Senate vote as early as Thursday, and Republicans have good reasons to block him.

President Obama wants North Carolina Congressman Mel Watt to run the FHFA, an obscure institution with enormous discretionary power. Since 2008 the agency has acted as the conservator for Fannie and Freddie and overseen the 12 Federal Home Loan Banks. FHFA oversees 48% of all outstanding U.S. mortgages and 77% of those issued last year—all taxpayer guaranteed—and Fan and Fred have $5 trillion in mortgage business.

Mr. DeMarco has interpreted the FHFA mandate to "preserve and conserve" the agency's assets to include protecting taxpayers. He has tightened underwriting standards, doubled guarantee fees, shrunk Fan and Fred's mortgage portfolios and prohibited the mortgage giants from entering new businesses.

He has also championed the return of a private mortgage insurance market and—most important—refused Obama Administration calls for mass writedowns on loan principal. Democrats favor the writedowns as a political sop to some homeowners, but Mr. DeMarco rightly says this would be unfair to borrowers who pay their bills on time as well as to taxpayers who would underwrite the losses.

Meanwhile, Fannie and Freddie are minting money again because of their market oligopoly, and the political impetus to reform is diminishing. Last year Congress used the agencies to pay for an extension of a payroll tax cut, and the Administration has seized Fan and Fred's profits.

Wall Street hedge funds betting on a revival of Fan and Fred have also re-emerged as champions of the toxic titans. They want to recreate the Wall Street-Washington nexus that made the giants so politically untouchable before the panic.

As for Mr. Watt, he's spent 20 years in the House encouraging the practices that got Fannie and Freddie into trouble. As a senior member of the Financial Services Committee, he followed Barney Frank in supporting Fan and Fred's affordable housing goals and lax underwriting, as well as taking campaign contributions from the toxic twins.

Mr. Watt is also notably coy about how he'd manage Fan and Fred while Congress figures out what to do with them. In an interview with this newspaper in May, Mr. Watt said he "didn't know" what the biggest differences would be between his approach and Mr. DeMarco's, what the mission of FHFA was, nor what are the biggest challenges facing the agency.

This isn't surprising because Mr. Watt is a civil-rights lawyer who lacks the minimum experience required by the FHFA conservator statute. The Housing and Economic Recovery Act of 2008 says the conservator shall "have a demonstrated understanding of financial management or oversight, and have a demonstrated understanding of capital markets, including the mortgage securities markets and housing finance." The word "demonstrated" does not suggest on-the-job training.

On June 24, 2010, Mr. Watt asked at a Congressional conference committee: "Can somebody explain to me what's in Tier 1 capital?" and "I just don't have enough knowledge in this area to understand." In December 2011 he said that, despite his Financial Services slot, "I didn't know a damn thing about derivatives. I am still not sure I do."

One reason Fan and Fred went belly up is that they didn't hire experts in finance. They deliberately hired CEOs who were experts in politics to protect their government guarantee. That's Mr. Watt. As recently as last December, he joined other Members of Congress in writing to House leaders urging that budget talks include "assistance to homeowners who are currently underwater on their mortgages," including the Fan and Fred principal writedowns that Mr. DeMarco has resisted. Mr. Watt now says he'd have different obligations at FHFA, but he has refused to rule out writedowns.

As FHFA director he'd also have the power to steer Fan and Fred profits to a new affordable housing "trust fund" created in 2008. Mr. DeMarco has never done so, preferring to repay taxpayers first. But Mr. Watt has pointedly refused to commit himself on the trust fund, which Mr. Frank designed to channel cash to left-wing groups like Acorn and its cousins.

Congress may finally try to pass housing-finance reform in the coming months, including Fan and Fred. If Republicans confirm Mr. Watt, they'll reduce the negotiating incentive for Democrats who will figure they can accomplish their political goals through Mr. Watt. The least GOP Senators should do is keep Mr. DeMarco on the job until a reform is passed. It's bad enough putting an amateur in charge of a $5 trillion business, but it's worse when that amateur's main expertise is politics.

I post two different articles regarding the Housing Pending Sales, one from Calculated Risk and one from Zerohedge. Notice that CR does not provide his usual commentary that he will have more to say later, or that as he customarily does, makes a positive prediction about the year to come. This is a major deviation from what he normally does. Has CR seen the coming collapse?

Zerohedge takes an opinionated view, comparable to what I have been saying for so long.

The NAR continues its misleading marketing campaign in this report. They apply restricted inventory issues and affordability issues for the drop, but still attempt to put a positive spin on it. This is a croc!

In Northern CA, the changes in Housing Sales is becoming clearer each day. Multiple bids are disappearing. Home values in many areas have started to fall again. Higher priced homes are not getting bids now, and homeowners are dropping the asking price by $100k or more. I am hearing that this is also beginning to occur in Southern CA. If so, this would completely contradict what the NAR is saying about the influence of restricted inventory.

For Sales next year, the CFPB still has not come out with final QM rules. The banks have no idea what to do, and cannot plan. The CFPB cannot simply state on Jan 1 that the new rules will be such and such, and that lenders can immediately begin to lend on the new standards. It takes months to implement the changes.

Banks are also very concerned about the DOJ and the new "disparate impact" strategy. With this, a lender can deny a loan on a perfectly valid reason, and the DOJ can claim a racial bias because an ethnic group member was denied the loan. It matters not that racial bias did not exist. It only matters what DOJ wanted to do.

You can't lend when you don't know what the new regulations are, and you can't lend when you have a rogue agency or two looking to screw you at every turn.

From the NAR: October Pending Home Sales Down Again, but Expected to Level Out

The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.6 percent to 102.1 in October from an upwardly revised 102.7 in September, and is 1.6 percent below October 2012 when it was 103.8. The index is at the lowest level since December 2012 when it was 101.3; the data reflect contracts but not closings. ...[Lawrence Yun, NAR chief economist said:]“The government shutdown in the first half of last month sidelined some potential buyers. In a survey, 17 percent of Realtors® reported delays in October, mostly from waiting for IRS income verification for mortgage approval,” he said.

The PHSI in the Northeast rose 2.8 percent to 85.8 in October, and is 8.1 percent above a year ago. In the Midwest the index increased 1.2 percent to 104.1 in October, and is 3.2 percent higher than October 2012. Pending home sales in the South slipped 0.8 percent to an index of 114.5 in October, and are 1.5 percent below a year ago. The index in the West fell 4.1 percent in October to 93.3, and is 12.1 percent lower than October 2012.

emphasis added

Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in November and December

Pending Home Sales Collapse At Fastest Pace Since April 2011, Drop To December 2012 Levels

Despite the downtick in rates for a month or two, the housing 'recovery' appears to have come to an end. This is the fifth consecutive monthly decline in pending home sales and even though a smorgasbord of Wall Street's best and brightest doth protest, it would appear the lagged impact of rising rates is with us for good (as the fast money has left the flipping building). This is the biggest YoY decline since April 2011 as NAR blames low inventories and affordability for the poor performance. Perhaps more worrying for those still clinging to the hope that this ends well is the new mortgage rules in January that could further delay approvals.

Via NAR,

“The government shutdown in the first half of last month sidelined some potential buyers. In a survey, 17 percent of Realtors reported delays in October, mostly from waiting for IRS income verification for mortgage approval,” he said.

“We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions. Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors,” Yun said.

Yun said there are concerns heading into 2014. “New mortgage rules in January could delay the approval process, and another government shutdown would harm both housing and the economy,” he said.

So the Fed provided the liquidity that bid prices up to a point that makes it unaffordable for the average joe and uneconomic for the average free-money-riding hedge fund. The Fed has made any recovery entirely dependent on extremely low rates and now is suggesting that taper is coming... and still... Strategists exclaim that rates are low by historical standards and so it won't matter!! come on!

Yes. Besides all the inside housing issues, sales and values don't keep going up when employment, disposable income and affordability are all headed down. If your family's healthcare cost just doubled or your job or hours were eliminated because of the healthcare law, do you have more or less to spend on the new house?

(Reuters) - U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks.

The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.

More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.

For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.

The number of borrowers missing payments around the 10-year point can double in their eleventh year, data from consumer credit agency Equifax shows. When the loans go bad, banks can lose an eye-popping 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.

There are scenarios where everything works out fine. For example, if economic growth picks up, and home prices rise, borrowers may be able to refinance their main mortgage and their home equity lines of credit into a single new fixed-rate loan. Some borrowers would also be able to repay their loans by selling their homes into a strengthening market.

ONCE USED LIKE CREDIT CARDS

But some regulators, rating agencies, and analysts are alarmed. The U.S. Office of the Comptroller of the Currency, a regulator overseeing national banks, has been warning banks about the risk of home equity lines since the spring of 2012. It is pressing banks to quantify their risks and minimize them where possible.

At a conference last month in Washington, DC, Amy Crews Cutts, the chief economist at consumer credit agency Equifax, told mortgage bankers that an increase in tens of thousands of homeowners' monthly payments on these home equity lines is a pending "wave of disaster."

Banks marketed home equity lines of credit aggressively before the housing bubble burst, and consumers were all too happy to use these loans like a cheaper version of credit card debt, paying for vacations and cars.

The big banks, including Bank of America Corp, Wells Fargo & Co, Citigroup Inc, and JPMorgan Chase & Co have more than $10 billion of these home equity lines of credit on their books each, and in some cases much more than that.

How bad home equity lines of credit end up being for banks will hinge on the percentage of loans that default. Analysts struggle to forecast that number.

In the best case scenario, losses will edge higher from current levels, and will be entirely manageable. But the worst case scenario for some banks could be bad, eating deeply into their earnings and potentially cutting into their equity levels at a time when banks are under pressure to boost capital levels.

"We just don't know how close people are until they ultimately do hit delinquencies," said Darrin Benhart, the deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. Banks can get some idea from updated credit scores, but "it's difficult to ferret that risk out," he said.

What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks, even seven years after it burst. By many measures the mortgage market has yet to recover: The federal government still backs nine out of every ten home loans, 4.6 million foreclosures have been completed, and borrowers with excellent credit scores are still being denied loans.

NO EASY WAY OUT

Banks have some options for reducing their losses. They can encourage borrowers to sign up for a workout program if they will not be able to make their payments. In some cases, they can change the terms of the lines of credit to allow borrowers to pay only interest on their loans for a longer period, or to take longer to repay principal.

A Bank of America spokesman said in a statement that the bank is reaching out to customers more than a year before they have to start repaying principal on their loans, to explain options for refinancing or modifying their loans.

But these measures will only help so much, said Crews Cutts.

"There's no easy out on this," she said.

Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising.

"These are very profitable at the beginning. People will take out these lines and make the early payments that are due," said Anthony Sanders, a professor of real estate finance at George Mason University who used to be a mortgage bond analyst at Deutsche Bank.

But after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping to $293.16 from $81.25, analysts from Fitch Ratings calculate.

That's why the loans are starting to look problematic: For home equity lines of credit made in 2003, missed payments have already started jumping.

Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That's a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.

This scenario will be increasingly common in the coming years: in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.

The Federal Reserve could start raising rates as soon as July 2015, interest-rate futures markets show, which would also lift borrowers' monthly payments. The rising payments that consumers face "is the single largest risk that impacts the home equity book in Citi Holdings," Citigroup finance chief John Gerspach said on an October 16 conference call with analysts.

A high percentage of home equity lines of credit went to people with bad credit to begin with — over 16 percent of the home equity loans made in 2006, for example, went to people with credit scores below 659, seen by many banks as the dividing line between prime and subprime. In 2001, about 12 percent of home equity borrowers were subprime.

Banks are still getting hit by other mortgage problems too, most notably on the legal front. JPMorgan Chase & Co last week agreed to a $13 billion settlement with the U.S. government over charges it overstated the quality of home loans it sold to investors.

TIP OF THE ICEBERG

Banks have differing exposure, and disclose varying levels of information, making it difficult to figure which is most exposed. The majority of home equity lines of credit are held by the biggest banks, said the OCC's Benhart.

At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an October regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years.

At Wells Fargo, $4.5 billion of home equity balances will reset in 2014 and another $25.9 billion will reset between 2015 and 2017. At Citigroup, $1.3 billion in home equity lines of credit will reset in 2014 and another $14.8 billion will reset between 2015 and 2017.

Bank of America said that 9 percent of its outstanding home equity lines of credit that have reset were not performing. That kind of a figure would likely be manageable for big banks. But if home equity delinquencies rise to subprime-mortgage-like levels, it could spell trouble.

In terms of loan losses, "What we've seen so far is the tip of the iceberg. It's relatively low in relation to what's coming," Equifax's Crews Cuts said.

(Reporting by Peter Rudegeair in New York; Editing by Daniel Wilchins, Martin Howell and Tim Dobbyn)

Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae FNMA -1.45% and Freddie Mac FMCC +0.78% play in the market.

The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don't make large down payments or don't have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates.

Fannie and Freddie, which currently back about two-thirds of new mortgages, don't directly make mortgages but instead buy them from lenders. The changes are aimed at leveling the playing field between the government-owned companies and private providers of capital, who are mostly out of the mortgage market now. Fannie and Freddie were bailed out by the government during the financial crisis but are now highly profitable.

The Federal Housing Finance Agency last week signaled the fee increases but didn't provide details. The agency's move came one day before the Senate voted to confirm Rep. Mel Watt (D., N.C.) as its director. It isn't clear whether Mr. Watt, who hasn't yet been sworn in, weighed in on the changes. An FHFA spokeswoman declined to comment on any discussions with Mr. Watt, who also declined to comment.

Mr. Watt will face heavy pressure by consumer groups and the real-estate industry to reverse course, industry officials said Tuesday. "There will be significant opposition very quickly once people understand what is actually being implemented," said Martin Eakes, chief executive of the Center for Responsible Lending in Durham, N.C., a consumer-advocacy nonprofit.

The changes take effect in March but will be phased in by lenders earlier. The fee increases come as the Federal Reserve contemplates an end to its bond-buying program, which has kept mortgages rates low, and as new mortgage-lending regulations take effect next month.Related

J.P. Morgan Sues FDIC Over WaMu

"The timing of it is impeccably bad," said Lewis Ranieri, co-inventor of the mortgage-backed security. "The question becomes: how much can housing take?"

In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don't have down payments of at least 20% and who have credit scores of 680 to 760. (Under a system devised by Fair Isaac Corp. FICO -1.75% , credit scores range from 300 to a top of 850.)

A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.

Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%.

Executives at Fannie and Freddie said last month that the fees they have been charging are enough to cover expected losses, but that those fees might need to rise in order to allow private investors, which target a higher rate of return, to compete. An FHFA official Tuesday said that even with the latest changes, Fannie's and Freddie's fees would be considered low relative to private firms'.

Mr. Ranieri, who runs a mortgage-investment firm, predicted that the move would backfire and hit the economy. Because the private sector isn't strong enough to lend more, "all this will do is tighten credit. You're just making housing less affordable," he said.

Industry executives also said the magnitude of the increases was a surprise. "It's like Beyoncé's album: It all of a sudden hit the market," said David Stevens, chief executive of the Mortgage Bankers Association.

In recent months, some large banks have been offering "jumbo" mortgages, which are too large for government backing, at rates below the conforming mortgages that are eligible for purchase by Fannie and Freddie for borrowers with the best credit. The higher fees could make conforming mortgages even more expensive than jumbos.

The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.

Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won't take effect before October 2014, the agency said.=============================================

Housing starts increased 22.7% in November to 1.091 million units at an annual rate, coming in well above the consensus expected 955,000 pace. Starts are up 29.6% versus a year ago.The rise in starts in November was due to gains in both single-family and multi-family units, which were up 20.8% and 26.8% respectively. Single-family starts are up 26.2% from a year ago while multi-family starts are up 36.8%.Starts in November increased in the Midwest, South, and West, but declined in the Northeast.New building permits declined 3.1% in November to a 1.007 million annual rate, but came in above the consensus expected 990,000 pace. Compared to a year ago, permits for single-unit homes are up 10.5% while permits for multi-family units are up 3.9%.Implications: Home building boomed in November, coming in at the highest level in more than five years. Despite recent volatility, the housing recovery is still strong. As the chart to the right shows, housing is clearly improving: single-family starts are up 26.2% from year-ago levels, while multi-family starts are up 36.8%. Those who are looking for signs of a slowdown will jump on the previous few months’ volatility and the weather-induced pattern. But we believe this is a mistake. Overall, the underlying trends for home building continue to rise and should remain in that mode for at least the next couple of years. The total number of homes under construction (started, but not yet finished) is up 28.3% from a year ago. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015). This is the level of construction that keeps the inventory of homes for sale at a stable level. Most of these homes will be owner-occupied but a large share will also be occupied by renters, which explains why multi-family construction has rebounded more sharply than the single-family sector over the past few years. Housing permits declined 3.1% in November but this was all due to a decline in volatile multi-family permits. Single-family permits rose 2.1%, are at the highest level since mid-2008, and are up 10.5% from a year ago. The bottom line is that no one should get worked up over every zig and zag in the data. Sometimes one indicator ticks down, like building permits; other times an indicator, like housing starts, will boom. It’s important to focus on the trends, and all trends point to further housing gains in the years ahead. In other positive housing news, yesterday, the NAHB index, which measures confidence among home builders, came in at 58 in December, up 4 points from November, and besides August, is at the highest level in eight years.

Representative Mel Watt testifies before the Senate Banking, Housing and Urban Affairs Committee confirmation hearing to be the regulator of mortgage finance firms Fannie Mae and Freddie Mac on Capitol Hill in Washington June 27, 2013.

CREDIT: REUTERS/YURI GRIPAS

(Reuters) - Mel Watt, who was sworn in on Monday to head the agency that regulates mortgage finance firms Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), has signaled a new approach to U.S. housing policy that will put more of an emphasis on ensuring access to credit.

Watt, a 68-year-old North Carolina Democrat who spent more than two decades in Congress, is the first permanent director of the Federal Housing Finance Agency in four years.

"Today's housing finance system is one of the keys to our economic recovery," Watt said in a statement after being sworn in. He said he hoped to "develop a strong foundation for moving this system forward for the benefit of all Americans at this critical point in our nation's history."

Even before taking office, Watt had said that he would delay a series of Fannie Mae and Freddie Mac loan-fee hikes that were announced by the FHFA a day ahead of his confirmation by the U.S. Senate in December. Industry and consumer groups decried the increases as driving up the cost of borrowing. Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said there were high hopes that Watt would "focus on expanding the mortgage credit box. The open question is how effective he will be and how strongly he will endorse that role," he said. "The first few months are likely to tell the market a lot about his tenure."

As the overseer of government-controlled Fannie Mae and Freddie Mac, Watt has authority over two companies at the heart of the U.S. housing finance system. The companies, which back about 60 percent of U.S. home loans, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. In doing so, they serve as major sources of funding for hundreds of banks.

Fannie Mae and Freddie Mac were seized by the government in 2008 as mortgage losses mounted. They have received $187.5 billion in taxpayer funds to stay afloat, while paying about $185.2 billion in dividends to the government for that support.

As the head of the FHFA, Watt will be able to influence how much mortgage credit consumers can access.

Watt's predecessor, Edward DeMarco, had faced a barrage of criticism from both housing groups and consumer advocates for blocking Fannie Mae and Freddie Mac from slashing mortgage balances for troubled borrowers. The move, however, won praise from Republicans for protecting the interest of taxpayers.

In contrast, Watt is expected to consider a targeted principal forgiveness program.

The mortgage industry also anticipates that he will expand federal programs that allow borrowers with loans backed by Fannie Mae and Freddie Mac to lower their interest rates even if they owe more on their loans than their homes are worth.

Mortgage-bond investors worry such a step and other efforts Watt may make to support the housing market could make the securities they hold less valuable.Watt was nominated by Obama in May, but his confirmation hit a snag when Senate Republicans threatened to filibuster his nomination. Senate Democrats later changed the rules to make it possible for Watt and other presidential nominees to overcome filibusters on a simple majority vote; previously it took 60 votes in the 100-seat chamber.

He was confirmed on a 57-41 vote. All 55 members of the Democratic caucus supported Watt, while only two Republicans backed him.

Republicans have argued that Watt, a lawyer who served in the House of Representatives from 1992 until his resignation to take the FHFA job this year, lacks the expertise to oversee the mortgage giants. Some worry he will be unable to resist White House pressure to pursue the administration's policy goals.

The FHFA director is selected by the president, but serves as an independent regulator for a five-year term. With a veteran Democrat in the post, the agency's policies are expected to more closely align with initiatives by the Democrat-controlled Senate and the White House to overhaul the nation's $10 trillion mortgage market.Obama and his fellow Democrats in Congress have started the reform process and are building bipartisan support to replace Fannie Mae and Freddie Mac, but they want to ensure some government support for housing remains.

That was fast. A little over two years ago, we declared that housing had not only bottomed, but was about to start its first real growth spurt since the bubble (Housing At An Inflection Point 11/2/2011). While some agreed, others expressed polite disagreement or, in some cases, incredulity.While we may not get everything right, this time we couldn’t have timed it better. Housing starts are up about 65%, new home sales are up more than 50%, existing home sales have turned the corner, and national average home prices are up around 15%. But now, instead of admitting they were wrong, the naysayers have immediately jumped on the “new bubble” bandwagon. In essence, the are saying, “if it’s good, it can’t be real,” and “anything good, must end in another crash.”We don’t doubt that another bubble could eventually develop. After all, the federal government is still too heavily involved in housing. Twenty-two percent of mortgage borrowers are making down-payments of less than 10% (thanks to the FHA), while Fannie and Freddie are providing long-term financing at very attractive rates.Meanwhile, the Fed is holding rates too low, and “tapering” doesn’t mean “tightening,” it just means the Federal Reserve is adding to banks’ excess reserves at a slower rate.

None of this is lost on us. We understand the implications. But, just because a few players on the team are cheating, that doesn’t always mean that a victory was all due to those players. In other words, there’s no clear evidence that home prices are already out of line with fundamentals.One measure of a bubble is price-to-rent ratios, calculated using the Fed’s quarterly report on the market value of owner-occupied real estate versus the Commerce Department’s estimates of rent. Since 1959, the typical Price/Rent ratio has been 15.At the peak of the 2003-2008 housing bubble, in early 2006, the P/R ratio hit an all-time high of 20.8. This means that national average home prices were about 40% higher than rents said they should be. The ratio then bottomed at 12.8 in late 2011, with home prices 15% below normal.After the price gains of the past two years, the P/R ratio was back up to 14.7 in the third quarter of 2013, the most recent for which we have data and we estimate it ended last year at 15, with home prices fairly valued. In other words, there is no evidence of a bubble in housing.Although the pace of home building is up substantially from a few years ago, this is necessary to keep up with population growth. And, more supply should hold the lid on home price gains. We look for home prices to continue to rise in the year ahead, but more moderately than last year, while rents rise as well. In other words, while conventional wisdom moves from “no recovery possible,” to “new bubble” territory, we see a market functioning reasonably well.

I realize that I don’t have the competency to evaluate the housing market and purchases, and I just don’t understand the effects of weather on housing. Of interest, I must assume that Wells Fargo is equally incompetent.

Not mentioned in the article is why WF is dropping underwriting standards……………..they have said that home sales are decreasing and will continue to fall, and they will go more in with FHA to replace the drop.

Of course, I have said many times that there were no more really qualified borrowers left, so lenders would drop standards again. So here it goes.

BTW, FHA, depending upon how they report is suffering from 10% to 20% delinquency rates. (Do to how they report, it is difficult to calculate and that is probably part of a planned action.) Dropping to 580 and 600 will only increase defaults, especially at a 96.5% LTV, which has a Default Percent Rate of 16.9% on average. Factor in dropping values and reduced income, this will rise at some point to 25% or greater.

Wells Fargo & Co. announced this month it would reduce minimum credit scores for certain mortgages eligible for government backing, prompting some declarations that subprime mortgages were making a comeback. After everything the mortgage industry has gone through, why would Wells Fargo want to go there again?

The short answer: It doesn’t.

Part of the issue is confusion over what actually constitutes a subprime loan. Unlike a prime mortgage, there isn’t a simple definition of a “subprime” loan.Originally, subprime referred either to the borrowers taking out these loans—borrowers with credit scores below 620, for example—or to lenders that specialized in higher-priced mortgages. (The Federal Reserve bank of St. Louis produced a handy primer in 2007.)

Over time, mortgages made by subprime lenders or mortgages made to subprime borrowers became lumped together as “subprime mortgages.” During and after the housing crisis, subprime took on an ever-more-sweeping (and loaded) definition. Today, many assume that subprime mortgages are irrationally risky loans made to borrowers who have little to no chance of paying them back.

So what exactly is Wells Fargo doing? The bank announced earlier this month that it would drop its minimum credit score for loans backed by the Federal Housing Administration to 600 from 640. The change applies only to purchase loans, not refinances, taken out through its retail channel. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to 850.)

True, Wells is extending loans to borrowers with subprime credit, which means they could be called, technically, subprime mortgages. But FHA-backed mortgages are fully documented, fixed-rate mortgages—not the crazy loans that fueled the subprime mortgage crisis.

The FHA wasn’t a major player in the subprime boom because its standards were considered too strict. The agency’s market share tumbled until the subprime market disintegrated in 2007, after which it returned as a major player.

The FHA requires minimum down payments of just 3.5%, making it an attractive option for first-time buyers; borrowers with credit scores below 580 have to put down 10%. Many lenders stopped making FHA-backed loans to borrowers with credit scores below 620 or 640 in 2009 as defaults soared, but in recent months, a handful of lenders have said that they’re willing to go as low as 580.

In 2011, Wells said it would make FHA loans to borrowers with 580 credit scores, though it later raised those minimums to 600 and then to 640.

Wells Fargo’s latest announcement followed discussions with housing regulators and other policymakers who are concerned about potentially creditworthy borrowers being shut out of the housing market, according to people familiar with the matter. Some of these borrowers may be “good credits, but they have trashed credit from the recession,” says Guy Cecala, publisher of Inside Mortgage Finance.

The FHA, in particular, has been encouraging lenders to roll back so-called “credit overlays” that banks enacted five years ago.

Before the bubble of the last decade, subprime loans typically required borrowers to make larger down payments and charged them much higher rates to make up for their spotty credit histories. Over time, a market for this type of subprime lending is likely to return, and there are already some green shoots—though Wells isn’t likely to be involved in this business anytime soon.

Moreover, the return of subprime lending could be slowed by new mortgage-lending regulations that provide stronger legal protections to borrowers if lenders don’t satisfy certain criteria verifying a borrower’s ability to repay a loan.

A handful of specialty lenders have expressed interest in making loans that fall outside of these standards, but so far, the actual production of these products is minimal.

“It’s like sex in middle school,” says Mr. Cecala. “Everyone is talking about it, but nobody is doing it.”

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Polar Vortex hits California housing market: California home sales fall over 10 percent on an annual basis. 2014 off to a drought in real estate.

The blame game is now out in full force for the slow start to housing in 2014. Nationwide, we’vebeen hearing about the polar vortex impacting real estate. Unfortunately it cannot be applied to California given that we’ve been in a full on drought. Winter never came to SoCal. I can’t remember a year with such little rain but hey, who needs water when you can purchase a World War II Cracker Jack box for $750,000 right? Like in most manias, the folks on the ground are the last to get the memo and many are still going out for ARMs to stretch their already impaired budgets. In 2004 one thought that was inescapable to me was the incestuous nature of real estate that was unfolding. That is agents, brokers, banks, builders, home owners, home buyers, Wall Street, tax collectors, and everyone tied to the machine got a mega-boost thanks to ever accelerating prices hikes. Few thought about what happens when a reversal occurred especially since incomes were not going up. The same has happened over the last few years in more subtle ways. The economy is weak and a big boost has come from home prices going up. Yet much of this is now driven by Wall Street and hedge funds. Housing is off to a slow start in 2014 and you can’t blame it on the polar vortex, especially here in a sunny and drought hit California.

New single-family home sales boomed 9.6% in January to a 468,000 annual rate, coming in well above the consensus expected pace of 400,000. Sales are up 2.2% from a year ago.

Sales were up in the Northeast, West and South, but were down in the Midwest.

The months’ supply of new homes (how long it would take to sell the homes in inventory) declined to 4.7 in January from 5.2 in December. The decline in the months’ supply was all due to a faster sales pace. Inventory remained unchanged.

The median price of new homes sold was $260,100 in January, up 3.4% from a year ago. The average price of new homes sold was $322,800 up 5.2% versus last year.

Implications: Well, that was a pleasant surprise! Despite terrible weather and what most economists thought was going to be a drop, new home sales surged 9.6% in January, coming in at a 468,000 annual rate, the highest level since July 2008. Although we still believe weather has been suppressing both home construction and sales, today's report also supports our theory that some of the recent weakness in existing home sales can be attributed to a lack of inventory, causing potential buyers to look more in the new home market. The surge in new home sales also undermines the theory that higher interest rates are holding back sales. The US had a bubble in housing during 2003-07, when 30-year mortgage rates averaged 6.1%. Today they are 4.4%. Adjusted for inflation, real mortgage rates are actually a little bit lower today than they were back in 2003-2007. The months’ supply of new homes – how long it would take to sell all the new homes in inventory – declined to 4.7 in January, well below the average of 5.7 over the past twenty years. As a result, as the pace of sales continues to recover in the years ahead, homebuilders still have plenty of room to increase both construction and inventories. Another way to think about it is that the construction of new homes can outpace a rising pace of sales. On the price front, the median sales price of a new home was up 3.4% from a year ago, while average prices are up 5.2%. In other recent housing news, the Case-Shiller index, which measures home prices in the 20 largest metro areas, increased 0.8% in December and was up 13.4% in 2013. Recent price gains have been led by Miami, Detroit, and Atlanta. The FHFA index, which measures prices for homes financed with conforming mortgages, also rose 0.8% in December and was up 7.7% in 2013. The annual increase in the Case-Shiller index and the FHFA index were both the largest since 2005. On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic manufacturing activity, fell to -6 in February from +12 in January. We see this as weather-related and not a reason to worry, unless negative readings continue into the Spring.

Interesting take here on housing policy. By favoring housing with our policies, we screw up the market for housing and hurt the people we are trying to help. Sounds familiar, just like government interventions in nearly everything else.

Michael Milken: How Housing Policy Hurts the Middle ClassMany buyers decided that the largest-possible house was a better idea than a retirement fund or a child's education

WSJ March 5, 2014 Opinion, (link below)

The American dream traditionally meant that anyone could get ahead based on ability and hard work. But over the past few decades, the United States government created incentives through housing programs and the tax code that changed the dream for many Americans. Middle-class families began to think of homes as investments, not just shelter. When the housing market crashed, everyone suffered—homeowners, investors, wage-earners and taxpayers.

Aggressive housing programs have not always helped the poor and middle class. The median net worth of American adults is now one of the lowest among developed nations—less than $45,000, according to the Credit Suisse CSGN.VX +1.32% Global Wealth Databook. That compares with approximately $220,000 in Australia, $142,000 in France and $54,000 in Greece. Almost a third of American adults have a net worth of less than $10,000. Those statistics don't convey the pain endured by millions of American families who lost their homes.Enlarge Image

As recently as 1980, government-sponsored Fannie Mae FNMA +10.08% and Freddie Mac FMCC +8.18% held, guaranteed or securitized fewer than 10% of U.S. mortgages or less than $100 billion. Today, it's $4.7 trillion. Add Ginnie Mae's mortgage guarantees, and the number exceeds $6 trillion. Since 2008, these agencies have been involved in more than 95% of all new mortgages. This massive exposure has been justified by clichés: Housing should be affordable; ownership creates financial independence; government programs sustain the economy by increasing ownership. But did ownership increase?

According to the Census Bureau, 65.6% of households owned a home in 1980. More than three decades and trillions of dollars later, the needle hasn't budged—it's still about 65%. Subsidized mortgages did create three things, none of them good:

1. The largest housing price bubble in American history. Research by Nobel economist Robert Shiller shows that U.S. housing prices declined in about half of the years since 1890. While U.S. stocks during those years enjoyed an average real rate of return of about 6% a year, the annual inflation-adjusted return on houses was a meager 0.18%. Factor in real estate's heavy transaction costs and that number turns negative. Nevertheless, in the housing-boom decade before 2007, many buyers decided that the largest-possible house (with an equally large mortgage) was a better idea than a retirement fund or their children's education.

By contrast, according to CLSA Asia-Pacific Markets, middle-class households in 11 Asian nations spend an average 15% of income on supplemental education for their children—nearly as much as the 16% spent on housing and transportation combined. Americans spend only 2% on supplemental education and 50% on housing and transportation. For American home buyers taking on big loans, there was no margin for error if they lost their job or the roof leaked.

2. Misguided economic priorities. Uniquely among nations, the U.S. gives mortgage borrowers a trifecta of benefits: extensive tax advantages, no recourse against the borrowers' nonresidential assets if they walk away, and typically no protection for the lender if the borrower prepays the loan to get a lower rate.Enlarge Image

Getty Images

These policies long seemed like a great deal for borrowers, but they wreaked havoc on the financial system. People with marginal credit were encouraged to finance more than 90% of the purchase price with 30-year mortgages. If interest rates later fell, they could refinance. If rates rose, they could congratulate themselves for locking in a low rate. If prices rose, they enjoyed all the upside and could tap the equity. If prices fell and they faced foreclosure, their other assets were protected because the loans were usually non-recourse.

The Consumer Financial Protection Bureau now wants to tip the scale even more against lenders by asserting the legal theory of "disparate impact." Consumers can sue if the volume of loans to any racial group or aggrieved class differs substantially from loans to other groups. No intent to discriminate is required, and it's illegal for a mortgage application to ask the borrower's race. Financial institutions trying to avoid making bad loans by implementing prudent underwriting practices can inadvertently get in trouble. A bank forced to pay a fine one year because it irresponsibly made "predatory" loans to people with bad credit can be fined the next year for not making similar loans.

3.Damage to the environment and public health. As the nearby chart indicates, the size of the average American house grew by more than half—about 900 additional square feet—over the past three decades while the number of people in the average house decreased. Larger houses need larger lots that are usually farther from the home owner's job. Construction, heating, cooling, landscaping and extended commutes consume more natural resources. Because breadwinners spend more time in cars, they have less time for their families.

As someone who helped finance several of the nation's leading residential builders, I understand the important role the industry plays in the economy. Homebuilders didn't create the problems. Policies made in Washington distorted the banking system and discouraged personal responsibility by subsidizing loans that borrowers couldn't otherwise afford. This encouraged housing speculation supported by financial leverage. Ultimately, taxpayers got the bill.

Housing's 2008 collapse led to the U.S. Treasury takeover of Fannie's and Freddie's obligations even as the Federal Housing Administration increased its guarantees to more than $1 trillion and the Federal Reserve stepped up purchases of mortgage-backed securities. Federal debt surged.

Americans will eventually have to pay for that through some combination of inflation, higher taxes, higher interest rates or reduced benefits and services. For now, the Fed is doing what the savings and loan industry did in the 1980s: borrowing short term while lending long term. When interest rates rise, the value of the government's mortgage holdings will decline.

Many housing experts believe that the solution is to reduce the government's role by attracting private capital. That's the centerpiece of proposals presented to the Senate Banking Committee last fall by Phillip Swagel, a senior fellow at the Milken Institute's Center for Financial Markets. Rather than hold or securitize mortgages, Fannie and Freddie would retain only a limited role as secondary guarantors. With the government as a backstop and private capital risking the first loss, mortgage interest rates would undoubtedly rise. But the taxpayer subsidy would fall. It's a reasonable tradeoff to transfer risk from taxpayers to investors and let the market determine rates. Congress appears to be moving in that direction as it debates various proposals.

Fortunately, the private sector is well-positioned to assume much of the government's role. Thanks to booming capital markets and accommodative central banks, there is tremendous liquidity worldwide. Fannie and Freddie have now paid the Treasury more in dividends than they received in the bailout. Private capital already plays a substantial role in commercial real estate and has the capacity to make comparable residential commitments.

Investments in quality education and improved health will do more to accelerate economic growth than excessive housing incentives. That will give everyone a better chance to achieve the real American dream.

Existing home sales declined 0.4% in February to a 4.60 million annual rate, coming in exactly as the consensus expected. Sales are down 7.1% versus a year ago.Sales in February were down in the Northeast and Midwest, but were up in the South and West. The decline in sales was due to slightly lower sales of both single-family homes and condos/coops.The median price of an existing home rose to $189,000 in February (not seasonally adjusted) and is up 9.1% versus a year ago. Average prices are up 7.4% versus last year.The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 5.2 months in February. The increase in the months’ supply was mainly due to a 120,000 increase in inventories.Implications: Existing home sales declined 0.4% in February to the slowest pace since July 2012. However, this was exactly what the consensus expected and should not change anyone’s impression about the economy. Existing home sales are counted at closing, and given harsh winter weather in December and January, when prospective buyers would have been placing contracts on homes, it makes sense that sales were weak in February. Besides the weather, another reason for slower sales is a lack of inventory, which could lead some buyers to purchase a new home instead. The good news was that inventories increased by 120,000 units in February and this suggests that the pace of sales will pick up in March and April, as contracts signed in February will show up in March and April sales. Expect more inventory to come onto the market in 2014 as home prices continue to move higher (median prices for existing homes are up 9.1% from a year ago). Also, credit remains tight, making it hard to get a loan to buy a home. This explains why 35% of all sales in February were all-cash transactions. However, we do not believe higher mortgage rates are noticeably holding back sales. The US had a bubble in housing during 2003-05, when 30-year mortgage rates averaged 5.8%. Today they are 4.3%. We remain convinced that the underlying trend for housing remains strong. Also, remember, existing home sales contribute almost zero to GDP, so there will be no noticeable negative effect to GDP from the temporary slowdown in sales. In other news this morning, initial claims for unemployment insurance increased 5,000 last week to 320,000. Continuing claims increased 41,000 to 2.86 million. On the manufacturing front, the Philly Fed index, a measure of factory sentiment in that region, rose to +9.0 in March from -6.3 in February.________________________________________

My comments:

Once again we see a steaming pile of excrement shoveled out by the National Association of Realtors, doing their best effort to meet the quality of spinning that is regularly done from D.C. Then people like Wesbury take the data and perform “projectile regurgitation of numbers vomit” and put their own spin on the data, and without doing any independent and in depth analysis.

1. Sales were down because of weather is a major reason according to the NAR. You stupid fools!!!! What do you think Seasonal Adjustments are about? The Seasonal Adjustment corrects for weather and other factors. Why then when things are worse does the NAR continue to blame the weather even after the seasonal adjustments are accounted for?

2. Did Wesbury even look at the real data? Since Jun 2013, Seasonally Adjusted Sales have fallen from 5.38m to 4.6m. This is a clear trend line that cannot be spun to the good, even though SA is designed to do just that.

3. Non SA dropped from 519k to 283k, but that is a number no one wants to report. You can’t spin raw data so easily.

4. All four regions, North, South, East and West are dropping in sales volume over the last 9 months. No one area is increasing. Year over Year and Month over Month will not report that.

5. The West dropped by 3000 units in the raw data, but it increased 60,000 in the SA data. 57k in SA adjustments? Does this make sense? Or is this just pure data manipulation?

6. For the first time, the NAR blames Student Debt as a contributing factor to lower sales. I have been screaming about this for three years, and the media for one year. The NAR and Wesbury only recognize it now?

7. The NAR now references slowing Investor Sales as a problem, but expects increasing inventory to offset the slowing sales through increased homeowner purchases. (Blackrock has decreased their purchases by 70% over last year.) After all, without the inventory buyers were “forced to buy” new homes. Hasn’t anyone told the NRA or Wesbury that new home construction is still at the lowest levels since data started to be kept in 1963? If inventory increases and people can buy existing homes again, then what happens to new home construction?

8. Wesbuy does not believe that the increase in rates that has occurred will pose a problem. He cites the higher rates in 2003-2005 and the sales volume as proof. The STUPID FUCKING IDIOT!!! 2003-2005 also saw the Stated Income products and the Option ARMs that heavily influenced sales volume. Those products no longer exist. Existing sales compared to the increase in rates show the change and slow down.

9. The higher interest rates also affect homeowner affordability. Higher rates and prices mean less affordability and less affordability, especially among the first time buyers who are already priced out of the market to due high Student Debt and low income.

10. What about the Qualified Mortgage and its restrictions? Lenders now have a fiduciary duty to a borrower to approve Ability to Repay the loan. If the borrower goes into default, they can sue for fees, all interest paid up to 3 years in length, attorney fees and damages. Lenders have no idea what the liability is and as a result, they are being very restrictive in lending. Furthermore, non QM loans will be subject to such scrutiny that most will not get done.

I could go on and on but you should probably realize by now the absurdity of what is being reported. What we see here is Empirical Analysis only where “observations” are made in the existing sales and then excuses are made for the results. No real analysis of the data is made. As a result, Empirical tells us nothing about what is really going on.

Fundamental Analysis is needed to improve upon the QA. FA requires in depth review of the different regions, looking at the various economic conditions, geographical conditions, demographics and other relevant factors that have an influence on sales. Then Quantitative Analysis is done to determine what is really going on.

The NAR and others don’t engage in the FA and QA Analysis. That is because it is costly, time consuming to set up the models, require personnel knowledgeable in Applied Mathematics, Statistics, Lending, Demographic Analysis and a variety of other disciplines to evaluate the data and models. More important, the results will more often than not, reveal the true underlying weakness in the positions that they regularly take about how the real estate market is improving.

What you do not hear are the people who are involved day to day in the real estate and lending industry and what they are reporting. Nor do you hear from the people who are truly evaluating the market, and who do not have a vested interest in reporting “good and improving” markets. The true experts know that the whole “real estate recovery” is nothing but propaganda trying to keep a failing market from tumbling further.

As one of many who are invested in housing, the rosy scenario spinning of Wesbury [hummed to the melody of The Plowhorse Trot] is appealing but I am better off knowing the truth.

As people's favorite expense, housing is an indication of how well people are doing economically. It has great appreciation in great economic times. But more so than gold, I value it as something people still need and value no matter how low it goes and no matter how badly our economy disintegrates.

Look carefully at Housing appreciation. The truth is that Housing as an investment is greatly overstated. Housing over the long run appreciates at 2-3% per year and nothing more. The years of 2002-2006 were an aberration, and 2012-2013 will turn out to be similar.

My sources, and they are one hell of a lot better than Wesbury and the National Association of Realtors, are now "hunkering down". The so called recovery is over, as they will tell insiders. The recovery only existed due to Fed actions and Regulatory Agency actions, and that is being phased out. 2014 is expected to be a "change" year, and unless the Fed steps in again to try and support interest rates, home prices, and MBS values, the recovery is now again in free fall in 2015.

You might have seen Existing Sales reported this week. It is down Year over Year, just like New Home Sales, but you would have to look hard to see where that was reported. Home values are also beginning to fall, but it will be several months before that is reported officially.

Even worse, the new Qualified Mortgage Lending Standards are paying havoc with the industry. No one knows yet how the courts will interpret the first lawsuits by homeowners, nor even what constitutes "compliance" with the statutes, so they have been slow to act so far. In the next few months, they will act, loosening standards because they assume that they are protected under the new QM Safe Harbor provision. Little do they know what awaits...............there is a hole in QM that if it had been the Super Bowl, Manning could have RUN for 5 90 year TD's in the first quarter alone.

Also,trends to be aware of when thinking of investing in real estate.

1. The 24-35 age cohort have a completely different view of real estate than previous age groups. They no longer see it as an investment opportunity and recognize it to be likely drag on investments in the future.

2. Firms who buy homes are "arbitrage" traders. They look for the difference in "spreads", the difference in what they make and what they pat. As spreads decrease, they bail out, which is what is happening now with Blackstone. Best way to describe them is a "cloud of locusts" who sweep in from the skies, rape, pillage and plunder, and then move on. Right now, they are moving on.

3. The so called drop in foreclosures is artificial as well. It is going to be increasing again soon, especially as Obamacare hits families over the next year or two.

There is much, much more I could write about, but the important thing to remember is that Housing, just like most things, is not existing as a stand alone function. Far too many factors affect housing and must be considered in any evaluation of what is to come. But the NAR, Wesbury and others ignore those factors because it would contradict what they want to believe.

"Look carefully at Housing appreciation. The truth is that Housing as an investment is greatly overstated. Housing over the long run appreciates at 2-3% per year and nothing more."

I like to assume zero appreciation and zero tax benefit when I buy. The 2-3% appreciation quoted is above and beyond rent collected and debt potentially paid down.

"The years of 2002-2006 were an aberration,"

Since the houses did not change, I just assume the dollar buying them was worth less. Then your loos was to hold anything that did not move with the dollar.

I find that broken houses can be bought for 50 cents on the dollar and then repaired with free labor and relatively small materials costs. (I paid as low as 15 cents on the dollar of the previous sale in the current down cycle.) This is not for everyone. If you are able to repair and restore efficiently, you are in for the cost of your free labor plus maybe a little over 50% of the value. For me, this takes out most of the risk for major market corrections.

On the upside, good real estate at least keeps up with inflation, and when the dollar is done and gone, people will still need a place to live.